The sudden change in the investment pattern is understandable given that the central bank has already reduced the monetary policy rate by 100 basis points since the beginning of the fiscal year. PHOTO: FILE
It is said that the best indications of the future course for the monetary policy come from the bond market.
And the verdict of Pakistan’s bond market is loud and clear: the central bank is going to cut the key interest rate by at least 50 basis points to 9.5% in the next policy announcement in May. Here is how the changing investment pattern in the bond market points to an imminent discount rate reduction.
Currently, the difference in the yields of three-, six- and 12-month market treasury bills is minimal. With present rates of return at 9.96%, 9.98% and 9.98% respectively, the difference is practically of three basis points only.
Yet investors chose to give the most attention to the 12-month instrument by investing over Rs171.3 billion in it during the last T-bills’ auction. In other words, almost three-fourth of the total market participation of Rs231.7 billion was concentrated in the 12-month instrument.
In contrast, the six-month instrument received Rs43.1 billion and the three-month bill attracted a mere Rs17.8 billion, which reflects the market expectation of a discount rate cut ahead.
The market’s logic is simple: let’s invest for the long term now because the central bank is about to slash the key interest rate shortly. In other words, no one would have invested for the long run knowing that the rate of return offered by short-term instrument is almost the same for now.
“This marks a U-turn from the previous auction conducted just a fortnight ago when a mere Rs16 billion was picked up in the 12-month bill versus Rs161 billion in the three-month paper,” KASB Securities research analyst Farrukh Karim Khan said in a recent research note.
The sudden change in the investment pattern is understandable given that the central bank has already increased the monetary policy rate by 100 basis points since the beginning of the fiscal year. Seldom do 12-month instruments receive investors’ interest in a phase of monetary tightening.
Nobody wants to part ways with their money by investing in long-term bills while interest rates are expected to come down in the immediate run.
PIBs gaining traction
Although the government intended to raise Rs500 billion in the last T-bills auction, total market participation remained at only Rs231.7 billion.
According to Khan, commercial banks held back their liquidity in order to participate in the upcoming auction of three-, five-, 10- and 20-year Pakistan Investment Bonds (PIBs).
The State Bank of Pakistan plans to hold the next PIB auction on March 26.
“This trend has continued throughout the first three months of 2014 where total participation in T-bills’ auctions has been Rs1,708 billion, well short of maturities of Rs2,451 billion and the government’s target of Rs2,450 billion,” he said, pointing out that PIB auctions held over the same period have attracted an investment of Rs445 billion compared to the maturity of only Rs66 billion and a target of just Rs120 billion.
Published in The Express Tribune, March 23rd, 2014.
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