PIB auction draws heavy investment at lower return
photo: file
Pakistan’s commercial banks and other financial institutions offered unusually healthy financing to the government at an auction of three to 10-year Pakistan Investment Bonds (PIBs), exhibiting a shift in their investment pattern to papers offering a fixed rate of return.
Earlier, they were extensively buying the bonds paying an adjustable rate of return and shorter-tenure T-bills of three to 12 months as they believed that rates would go up further.
Arif Habib Limited economist Sana Tawfik noted the change in the investment strategy at the latest PIB auction held on Wednesday.
The auction saw a decline of up to 180 basis points (bps) in the rate of return (cut-off yield) on expectations the central bank’s key policy rate had peaked out at the record high of 22%. The bank would cut its policy rate “sooner rather than later” amid a decelerating inflation, said Topline Securities CEO Mohammed Sohail.
The policy rate reduction will provide a breather to the struggling economy and create room for growth and job creation.
At the PIB auction, banks and other financial institutions offered financing of Rs964 billion, which was 500% more than the government’s target of Rs160 billion. The demand for a reduced rate of return encouraged the government to accept Rs246 billion worth of offers.
Talking to The Express Tribune, Tawfik said investors parked a maximum amount of Rs139 billion in three-year PIBs in the wake of easing inflation and a potential reduction in policy rate.
The cut-off yield on three-year fixed-rate PIBs fell 180 basis points (bps) to 17.39% compared to 19.19% in the previous auction held on October 2, 2023.
Five-year PIBs received investment of Rs42.5 billion but its cut-off yield dipped 100 bps to 15.96% compared to 16.95% in the last auction. Investors took some position in those papers in order to play safe in case inflation spiked again and the policy rate went up.
Financial institutions like insurance companies invested Rs64.5 billion in 10-year papers as they mostly received funds from their clients for 10 years or more. Its cut-off yield dropped a mere 15 bps to 15.10% compared to 15.25% earlier.
The institutions, however, submitted no bids for 15-, 20- and 30-year PIBs for the second consecutive auction.
The AHL analyst was of the view that it may take some time before the fixed rate of return on longer-tenure papers could go up compared to T-bills as it was the beginning of the shift in investment strategy.
Topline’s Sohail said on social media platform X that a big fall in Pakistan’s bond yields signaled that the market was hoping for a “sooner-than-expected” policy rate cut and that too at a faster pace.
“The three-year PIB yield is already down 4% in the last two months to 17% at present compared to 21% earlier,” he said. “With global oil prices falling, the bull-run in money market may continue.”
Tawfik said they expected an uptick in inflation in November and December 2023 following massive hike in gas prices and due to a low base effect. However, inflation will drop sharply in the second half (Jan-Jun) of current fiscal year.
The potential decline in inflation will encourage the State Bank to slash its policy rate. There are high expectations the bank will make the first cut in March.
Published in The Express Tribune, November 10th, 2023.
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