Rating upgrade sparks Eurobond rally

Pakistan's international bonds surged on Friday, following Standard & Poor's upgrade of the country's sovereign credit rating to 'B-' with a stable outlook, marking Pakistan's return to this rating level for the first time since July 2022.

The upgrade, driven by improving macroeconomic fundamentals and reduced sovereign default risk, sparked strong investor interest across the yield curve, with notable gains in longer-tenor bonds.

According to data from Arif Habib Limited, the 30-year bond maturing in April 2051 led the rally, rising 4.4% day-on-day to trade at $87.10, with a yield-to-maturity (YTM) of 10.3%. The bond has gained 10.9% month-to-date (MTD) and 11.1% calendar year-to-date (CYTD).

Similarly, the 30-year March 2036 bond rose 3.9% day-on-day, reaching $87.80, with MTD and CYTD gains of 11.1% and 12.8%, respectively. Among shorter maturities, the seven-year Sukuk (January 2029) rose 2.3% to $91.60 (YTM 7.1%) and the 10-year bond (December 2027) gained 1.5%, closing at $98.02 (YTM 7.8%).

Shorter-dated bonds recorded more modest improvements. The five-year bond (April 2026) rose 1.2%, trading at $100.12 with YTM of 5.8%, while the 10-year bond (September 2025) edged up 0.2% to $100.36.

This rally continues the upward momentum observed in recent months, reflecting a broader recovery in investor confidence as Pakistan progresses on key macroeconomic fronts, such as external account stabilisation, fiscal consolidation and IMF programme compliance. The Eurobond price trends show a steady recovery from mid-2023 lows, aided by improved external inflows and successful debt rollovers.

Meanwhile, the State Bank of Pakistan (SBP) injected a total of Rs2.667 trillion into the financial system through open market operations (OMOs).

The liquidity injection primarily consisted of conventional reverse repo operations, amounting to Rs2.345 trillion, with 23 quotes accepted at a rate of 11.01%. In contrast, the Shariah-compliant Mudarabah-based OMO accounted for a smaller share of Rs322 billion, with only two quotes accepted at a higher rate of 11.13%, possibly reflecting different demand dynamics or risk pricing.

All accepted bids were for the seven-day tenor, as no bids were received for the 14-day option. This indicates the SBP's focus on short-term liquidity support to manage immediate government fiscal needs.

Overall, the conventional operations made up 87.9% of the total injection, while the Islamic liquidity operation contributed 12.1%, highlighting the central bank's dual approach in managing system liquidity while catering to both conventional and Islamic banking sectors.

Furthermore, gold prices in Pakistan fell for the second consecutive day on Friday, tracking losses in the international market, where prices dipped amid a stronger US dollar and easing geopolitical concerns following progress in US-EU trade talks, which dampened demand for safe-haven assets.

According to the All Pakistan Sarafa Gems and Jewellers Association, the price of 24-karat gold per tola declined Rs2,300 to settle at Rs356,700, while the 10-gram rate dropped Rs1,972 to Rs305,812. The downward movement follows Thursday's sharp drop, when gold per tola lost Rs5,900, closing at Rs359,000.

Meanwhile, the Pakistani rupee appreciated 0.27%, or 77 pasia, against the US dollar in the inter-bank market on Friday, closing at Rs283.45 compared to Rs284.22 a day earlier, according to data released by the State Bank of Pakistan (SBP).