PIB yields drop 19-56 bps on rate cut expectations

KARACHI: The cut-off yields on Pakistan Investment Bonds (PIBs) fell on Wednesday, reflecting expectations that the central bank will cut interest rates further at the upcoming monetary policy meeting on January 27.

The government raised Rs385 billion through the auction of fixed-rate PIBs, exceeding its target of Rs350 billion. The State Bank of Pakistan (SBP) received bids totalling Rs1.568 trillion.

Cut-off yields across various tenors dropped by 19 to 56 basis points (bps), currently ranging from 11.9 per cent to 12.8 per cent.

In December, the SBP reduced the policy rate by 200bps to 13 per cent, marking the fifth consecutive rate cut since June. This brings the total rate reductions for 2024 to 900bps.

Market projections suggest that Pakistan’s inflation will continue to decline, expected to settle between 3.0 per cent and 4.0 per cent in January.

Analysts believe that this will result in real interest rates exceeding 10 percent, potentially the highest in recent years. Favourable conditions may allow for a rate cut in the upcoming monetary policy meeting, although expectations indicate that any reduction this month will likely be modest. A rate cut exceeding 100bps would likely surprise market participants.

Topline Securities noted that maintaining sufficient real rates is necessary to accommodate any external or budgetary shocks. To mitigate impacts from a potential gas price hike, an increase in fuel prices driven by the petroleum development levy (PDL), or any mini budget effects, it is believed the central bank will aim to maintain positive real rates in the range of 300 to 400bps in the medium term, considering forward-looking inflation.

Driven by falling inflation expectations, the six-month Karachi Interbank Offered Rate (Kibor) and the Treasury bills rate have decreased by 23 to 32bps since the last monetary policy meeting on December 16, currently standing at 11.87 per cent and 11.65 per cent, respectively.