Bond yields on downward trajectory

KARACHI:

The yields on government debt securities are on a decline in both the primary and the secondary markets for the past one week as they have cumulatively dropped by 22-65 basis points (bps) on three-month to 10-year bonds after authorities took measures to fix “unwarranted” surge in the returns.

The yields dropped 15-25 basis points on three to 10-year Pakistan Investment Bonds (PIBs) in the secondary market on Friday in the wake of the announcement that the International Monetary Fund (IMF) board would consider resuming its loan programme for Pakistan on January 12, 2022.

The cut-off yields largely peaked out in an auction of three to 12-months T-bills held before monetary policy tightening on December 14, 2021. At that time, Adviser to Prime Minister on Finance and Revenue Shuakat Tarin had warned banks that they were unnecessarily charging high yields and the government would take measures to fix the rates if the financial institutions failed to rationalise them.

The State Bank of Pakistan (SBP) had also noticed the unnecessary hike in the returns and said in its latest monetary policy statement that “across all tenors, secondary market yields, benchmark rates and cut-off rates in the government’s auctions have risen significantly.”

The MPC (monetary policy committee) noted that this increase appeared unwarranted, it said.

The banks were apparently speculating on the returns in the backdrop of record high import bill, of around $8 billion, and lofty inflation reading at 11.5% in November 2021.

The high yields enhanced the cost of borrowing for the government as it occasionally borrows from the commercial banks to finance the budget deficit. The government auctions the bonds to borrow the money.

The yield on three-month T-bill has dropped by 57 basis points to 10.21% in the secondary market on Friday since it hit a recent high of 10.79%. The returns on six-month T-bill declined 51 basis points to 10.9% in the secondary market compared to its peak. Similarly, the returns on 12-month T-bill fell 22 basis points to 11.54% compared to its historic high value, according to the data compiled by the Ismail Iqbal Securities.

The yields on three-year Pakistan Investment Bond (PIB) declined 65 basis points to 11.3% in the secondary market on Friday. On five-year PIB, it dropped by 63 basis points to 11.37%. The yields of 10-year PIB dived 61 basis points to 11.66% in the secondary market, according to the data.

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“The latest drop in yields in the secondary market came after finance ministry spokesperson tweeted that sixth review (of Pakistan’s economy) will be presented to the IMF Board on January 12, 2022,”Ismail Iqbal Securities Head of Research Fahad Rauf said.

IMF would release the next tranche of around $1 billion under the loan programme following approval from its board. Earlier, the government reached staff-level agreement on resumption of the bailout package which has been on hold since June 2021.

“The receipt of the next tranche of IMF loan is expected to be followed by rollover of other foreign debts and higher inflows from bilateral and multilateral lenders,” he said while talking to The Express Tribune. “The receipts will strengthen the country’s foreign exchange reserves and improve Pakistan’s capacity to make international payments.”

“Improvement in domestic economy always helps in curbing bond yields,” he said.

Earlier, the returns on bonds peaked out due to uncertainty over resumption of the IMF programme.    

Besides, there are expectations that other economic indicators such as inflation reading and import bill might decrease in the current month and in future. “If the environment remains favourable, the central bank will keep the benchmark interest rate unchanged in its monetary policy announcements of January and March,” he said.

When the yields were not declining in the primary and secondary markets, SBP injected Rs1.7 trillion by inviting the longest open market operation (OMO) of 63-day at a fix rate “to signal that benchmark interest rate would remain stable in January’s monetary policy,” he said.

“The OMO (injection) helped curb yields of T-bills and PIBs both in primary and secondary markets,” he said.

Earlier, the central bank cumulatively increased the interest rate by 275 basis points in three meeting from October to December 2021 to 9.75% at present.

The rate was increased to control inflation and reduce the import bill.

Published in The Express Tribune, December 24^th, 2021.

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