Yields on bonds spike in global markets
Yields on Pakistan’s international bonds and Sukuk have spiked in global markets, indicating the risk of default on international payments has increased in the wake of monetary policy tightening and economic slowdown across the world.
The yield soared 778 basis points to a five-week high of nearly 40% on the Third Pakistan International Sukuk Co Ltd worth $1 billion. The five-year Sukuk is maturing on December 5, 2022.
The Sukuk’s yield had recovered to 18% around the days the International Monetary Fund (IMF) executive board revived the $6.5 billion loan programme for Pakistan on August 29, 2022.
Earlier, it had spiked to 50% in mid-July 2022 on delay in the resumption of lending programme, domestic brokerage houses reported.
Similarly, the yield increased 119 basis points on the 10-year Pakistan Government International Bond worth $1 billion, maturing on April 15, 2024.
Yields on other global bonds and Sukuk – Shariah-compliant bonds – increased in the range of 1 to 63 basis points to 19% to 29%. The five to 30-year bonds mature between September 2025 and April 2051.
Talking about the state of Pakistan’s economy last week, Finance Minister Miftah Ismail said “the world thinks Pakistan would default...I will not let Pakistan default till I am the finance minister.”
Ismail Iqbal Securities Head of Research Fahad Rauf noted that bond yields were on the rise for the past several days due to a hike in interest rates by global central banks.
“Monetary policy tightening by global central banks is likely to push investors to pull out of emerging markets (developing countries) including Pakistan and reduce their capacity of making international payments (import payments and foreign debt repayment).”
Arif Habib Limited Head of Research Tahir Abbas said the yields shot up mostly of bonds maturing in the near future (in 2022 and 2024). Global investors’ interest has dropped significantly in Pakistan’s international bonds due to the emergence of several issues in global and domestic economies.
The strengthening of the US dollar against global currencies, depreciation of Pakistani rupee, high inflation around the world, and low foreign exchange reserves in the country made global investors less interested in Pakistani bonds.
The drop in global investors’ interest in Pakistani bonds is evident from the low trade-in country’s bonds in the world market.
“Pakistan’s international bonds have become ill liquid, meaning the daily trade turnover has reduced to $10-15 million these days compared to on an average $125-150 million per day. Accordingly, low trade in the bonds makes a high impact on the country’s bond yields,” he said.
Besides, the floods have impacted the domestic economy as well. The flood-related losses are being estimated at $20 billion these days compared to $10 billion earlier. However, they said, the global investor concerns are overplayed. “Pakistan is now under IMF programme and has full arrangement for making global payment for the current fiscal year 2023,” Rauf said.
Punjab, the province which produces around 70% agricultural economy of Pakistan, has largely remained safe from the widespread heavy rainfall and flash floods. Therefore, the economic activities would pace up in the coming months and address global investors’ concerns.
“But, yet, economic growth would slow down to less than 2% in FY23 compared to a pre-flood estimate of 3.5-4% for the year,” he said.
Rupee down
Pakistani currency maintained a downturn on the sixth consecutive working day, dropping by a fresh 1.21% (or Rs2.76) to close at a five-week low at Rs228.18 in the interbank market on Friday.
The rupee is depreciating mostly due to the dollar strengthening against other global currencies.
Published in The Express Tribune, September 10th, 2022.
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