Yields in secondary market increase

Rise comes as market expects hike in policy rate

KARACHI:

The government’s cost of borrowing from commercial banks surged by 88-115 basis points on Wednesday as the financial institutions offered money for three to 10 year tenors at a higher markup rate on the outlook that the central bank would increase the benchmark interest rate in the middle of next month.

The government borrowed Rs193 billion by auctioning Pakistan Investment Bonds (PIBs) of three to 10 year maturity to commercial banks against a target of Rs100 billion, “considering the lending rate on the longer maturity bonds (PIBs) was lower compared to the ones for short maturity bonds (three to 12 month T-bills),” Pak-Kuwait Investment Company Head of Research Samiullah Tariq said while talking to The Express Tribune.

“This is an inverse situation, as the markup rate on longer tenor bonds usually remains higher compared to short-term maturity bonds.”

“The financial market (mostly commercial banks) strongly forecasts an increase in the benchmark interest rate by the central bank in the monetary policy statement on April 19, as international oil prices have remained elevated despite a significant reduction in the recent days,” Arif Habib Limited (AHL) economist Sana Tawfik said.

Pakistan heavily relies on imported energy. The international crude WTI (West Texas Intermediate) was trading at around $95 a barrel on Wednesday compared to 14-year high of $130 per barrel on March 7. It stood at around $70 per barrel about a year ago.

Earlier, commercial banks offered money at a higher interest rate at T-bills auction that took place immediately after the central bank left the benchmark interest rate unchanged at 9.75% on March 8 for the next six weeks. In the monetary policy statement, the central bank announced that it could revise the rate anytime (if required) if the oil price stayed on higher side in the wake of Russia-Ukraine war, she recalled.

Secondly, the inflation reading has remained high mainly due to the uptrend in energy and food prices at world markets.

“The market is expecting an upward revision in the key policy rate in the range of 50-100 basis points in April,” she said.

“If needed, we believe, the rate will increase in the range of 25-50 basis points,” she said, adding that hopes for an emergency monetary policy meeting had subsided and it was scheduled to meet on April 19.

The two experts said that the government borrowed an increased amount of money in the latest PIB auction under its pre-decided policy of shifting the debt portfolio to longer tenor bonds from the one in shorter tenor bonds.

The borrowing through longer period instruments gives time to the government to increase its collection of revenue from taxes and then reduce reliance on debt in the long-run.

Secondly, borrowing through long-term bonds also removes uncertainty on fluctuations in the interest rates in the short-term, they said.

Topline Securities, in a report, said that banks offered huge money worth Rs589 billion to the government against its target of Rs100 billion at the PIB auction on Wednesday “due to flattening/ inversion of yield curve amid reversal in oil prices and expectation of lower inflation going ahead”. The breakup suggests the government borrowed Rs54 billion through selling three-year PIB at the cut-off yield of 11.85% which was 115 basis points higher compared to 10.69% in the auction held on February 16, research houses reported citing the central bank data.

It raised Rs80 billion through five-year PIB at the cut-off yield of 11.75%. This was 100 basis points higher compared to 10.75% in the auction held in February.

The government raised another Rs59 billion through 10-year PIB at the cut-off yield of 11.74%. This was 88 basis points higher compared to 10.86% in February.

The government rejected the banks’ bids for 15-year and 20-year bonds, while it received no bid for 30-year PIBs.

Published in The Express Tribune, March 17^th, 2022.

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