Single-digit PIB yields to spur equity investment

KARACHI: The yields on Pakistan Investment Bonds (PIB) have come down to an eight-year low, which would result in more cash flows from institutions and high net worth individuals to come to equities, while banks would opt towards private sector credit, analysts said on Thursday.
Yields on fixed income government papers have come off considerably in the New Year on the back of interest rate expectations and liquidity, they said.
In the first PIB auction of 2015, held on January 28, the central bank has received good response by local investors with the participation of Rs292 billion, while the cutoff yields have declined by an average 110-170 basis points to 8.89 percent for three-year, 9.7 percent for five-year and 10 percent for 10-year papers.
This is the first time since 2007 such low levels have been seen. Similarly, money market yields have also come down by 72-75bps during January on benign inflation outlook and falling policy rates, the analysts said.
To recall, the banks have made record investment of Rs2.6 trillion in PIBs during 2014 against annual average of Rs129 billion since 2001. Considering the fact bonds yields are inversely related to their market prices, the sharp decline in the PIB yields is going to beef up the banks’ revaluation surplus on fixed income instruments, hence, higher book value.
It would also encourage bankers to shift to the private sector lending for higher returns and investors to turn to stock market, the analysts said.
“With yields coming down, valuations of listed companies will theoretically be revised upwards by 5-10 percent. We expect more cash flows from institutions and high net worth individuals to come to equities if yields on PIBs remain low,” Sufyan Subhani at Taurus Securities said.
Meanwhile, global commodity slump would provide the necessary cushion to the economic managers to bring back growth in the country and invest in the infrastructure projects, he added.