Bond yields, KIBOR at two-year high

KARACHI: Pakistan Investment Bonds (PIBs) yields humped to their highest in over two years on Friday, as possibility of another aggressive interest rate hike by the central bank to fight off stubborn inflation and ease pressure on rupee came into tighter focus, analysts said.

In the run-up to the State Bank of Pakistan’s next monetary policy meeting on December 14, the market expects a 100 basis points increase in the policy rate to 9.75 percent after consumer inflation in November hit double digit and an expatiation of large current account deficit. The high global oil prices and fast depletion in the foreign currency reserves would also force the SBP’s Monetary Policy Committee to continue its tighter stance.

The high cut-off yields on the government securities indicate an increased borrowing requirement from commercial banks.

“Bond yields are up 52 bps in last two days. The 3-year PIB is now near 11.89 percent, while 5-year is at 12 percent and 10-year is at 12.3 percent. These levels are being witnessed after 26 months,” brokerage Topline Securities said in a report.

“Bond yields are up 40-55 bps since the last PIB auction on November 29, while it is up 145 bps since SBP increased the policy rate by 150 bps on November 19.”

Previously, the three-year bond went as low as 8.3 percent, while the five-year bond’s low was at 9.2 percent and 10-year bond’s low was at 9.8 percent, the report said.

The six-month Karachi interbank offered rate (KIBOR) also rose, hitting a 21-month high. It increased to 11.5 percent on Friday, which is up 415 bps from its low of 7.3 percent.

The sudden changes in yields and the KIBOR happened since last week after the T-Bill auction on Wednesday.

The government in the said auction raised Rs504 billion where unexpectedly cut-off yield on six-month T-Bills yields increased by 300 bps to 11.5 percent.

“It is important to note that with the IMF programme in place, commercial banks offer the largest window for funding the financing requirement of the government as borrowing from the central bank is discouraged, Topline report said.

“This is also on account of the deteriorating external account situation of the country and rising inflationary pressures.”

It is also interesting to note that spread between KIBOR and policy rate has increased significantly to 275 bps compared with the last three-year average differential of 50 bps.

The government is likely to continue to take economic stabilisation measures to meet the IMF conditions. So, there will be interest rate adjustments, energy tariff rationalisation, withdrawal of tax exemptions, and a few other tightening fiscal and monetary actions.