Investment bonds: Demand rises with fall in interest rates

Ministry says debt re-profiling is ideal when yield curve is going downward.

ISLAMABAD: The Ministry of Finance, while explaining its strategy of switching from short to long-term debt papers, has said that market appetite for long-term papers increases only when interest rates are declining.

“Only in such an environment, sizeable lots can be obtained within a narrow price band,” it said in a statement on Friday.

On the other hand, according to the ministry, when interest rates are considered to have bottomed out, the participation of market players in long-term papers diminishes. In this case, even a small volume can be purchased at a considerable premium to prevailing market prices.

“The ideal time for (debt) re-profiling is the plummeting rate environment. This actually led to a much lower cost than what would have been incurred in a rising market.”

A couple of days ago, economist Dr Ashfaque Hasan Khan argued that the government though adopted a good strategy to venture into long-term papers to avoid the risk of rollover, it chose a wrong time when interest rates were falling.

According to the finance ministry, in June 2013, 64% of total domestic debt had a maturity of less than one year.

It pointed out that there would always be a difference between the return on short-term treasury bills and long-term Pakistan Investment Bonds (PIBs), which was called term premium.

The premium in July 2013 was 1.37% before the start of debt re-profiling. It went up to 1.77% in January 2014 due to certain other factors and in the absence of the Medium Term Debt Strategy. The premium rose to a high of 2.08% in June 2014 when re-profiling had started. It dropped to 0.99% in December 2014 and at present it stands at 0.43%.

Under the re-profiling strategy, the ministry said, PIB coupon rates had been cut by 2-2.25% for the first time since August 2008.

Published in The Express Tribune, May 9^th,  2015.

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