Global bonds rally despite Indo-Pak escalation

Despite escalating Indo-Pak tensions following airstrikes, Pakistan's Euro and Sukuk bonds have posted notable gains in global markets, highlighting investor confidence in the country's macroeconomic management and IMF-backed reform agenda.

Yields on Pakistan's international bonds have declined by 18-61 basis points across various tenors over the last 8-9 days, reflecting a corresponding rise in bond prices.

"Surprisingly, yields on Pakistan Euro/Sukuk bonds in the international market have improved (prices increased) by 18-61 basis points after falling on average 160 basis points across various tenors in the last 8-9 days," wrote Topline Securities in a research report.

Pakistan International Bond (Eurobond) and Sukuk bond prices are improving due to growing investor confidence in the country's economic outlook, said Ali Najib, Head of Sales at Insight Securities. Positive factors include IMF support, improved foreign reserves, controlled inflation, and better fiscal discipline.

These developments reduce default risk, attracting global investors and raising demand for the bonds.

As demand rises, bond prices increase and yields fall, reflecting stronger creditworthiness and stability.

Ali Najib said Pakistan's Eurobond and Sukuk are traded actively in international markets, and recent developments have significantly boosted investor confidence.

The successful progress on the International Monetary Fund (IMF) programme, which is effectively on track, along with improved macroeconomic indicators, is playing a major role. Moody's had previously revised Pakistan's outlook upward, and more recently, Fitch also upgraded its rating.

The Finance Minister has been engaging regularly with global rating agencies, which increases the likelihood of further positive revisions from Moody's and S&P going forward.

Najib highlighted that inflation is at historic lows, a key indicator of macroeconomic stability. He added, "Last year, in June 2023, Pakistan was on the brink of default with SBP reserves down to just $3.5 billion — barely enough to cover one month of imports. Today, reserves have recovered to $11 billion with the central bank and an additional $4 billion with commercial banks.

The State Bank of Pakistan aims to push this to $14 billion by June, supported by inflows including a $1.5 billion IMF tranche and a $1.5 billion rollover from ICBC, China."

Commenting on the Indo-Pak escalation, Najib noted that the military developments occurred around midnight, which means international markets were likely closed by then.

The full market reaction may be reflected more clearly in the next trading session.

The State Bank of Pakistan (SBP) raised a total realised amount of Rs844 billion through the auction of Pakistan Investment Bonds (PIBs) held on Wednesday.

This came a day after the central bank's monetary policy announcement, which triggered a broad-based decline in yields across the secondary market.

Short-term yields saw significant declines, with the 3-month, 6-month, and 12-month Pakistan Revaluation Rates (PKRV) falling by 55 basis points, 51 basis points, and 48 basis points to settle at 11.28%, 11.30%, and 11.28%, respectively. Similarly, yields on longer-tenor bonds also eased, with the 3-year, 5-year, and 10-year instruments declining by 25 basis points, 21 basis points, and 20 basis points to reach 11.48%, 12.00%, and 12.23%, respectively.

The decline in yields reflects improved investor sentiment and expectations of a lower interest rate environment going forward.