EUR 4.27 For Business Accounts Only

Pakistan Economy: Govt. Bond Auction - Record Participation 3-Year Yield 14.25%

• Government of Pakistan (GoP) conducted first Pakistan Investment Bonds (PIBs) auction yesterday after signing IMF program, wherein tenor wise the govt. collected Rs120bn, Rs55bn and Rs25bn in 3-year, 5-year and 10-year bonds at cut-off rates of 14.25%, 13.8%, and 13.55% respectively.
• The cut-off rates were up by 55bps for 3-year bonds and remained unchanged for 5-year bond. However, for 10 year bond rates were down by 15bps compared to previous auction held on Jun 26, 2019.
• Out of total participation of Rs700bn, the govt. fetched Rs201bn (29% of the bid amount) in fixed rate PIBs. In 10-Year floater PIBs bond, the govt. raised Rs84bn out of total participation of Rs128bn at 75bps above benchmark rate.
• Cumulatively Govt. raised Rs285bn in yesterday’s auction. This was the second largest auction in last 5 years.
• The higher participation and rates of 13-14% are in line with our expectations we reported in our annual strategy titled ‘Pakistan Market Outlook 2019: Weak Macros to Limit Market Upside’ dated Dec 17, 2018.
• Historically, similar size of auctions were also conducted by PML N govt. (please see next slide) during 1H2014 where around Rs1.8-2.0tn were raised by Govt. to meet IMF requirement of shifting borrowings from SBP to commercial banks or other investors.
• We believe, today's auction is also in response to IMF’s criteria of lengthening maturity profile of government loans and shift of borrowings from SBP to commercial banks and other investors.
• Yield curve remains inverted in this auction. Lower return on 10-year PIBs compared to 3-year PIBs and 1-year T-bill signals soothing of inflation going forward. While, higher rates in 3-year and 1-year note/bill reflects investors need for higher return against expectations of higher inflation and modest tightening in near terms. We maintain our view of further hike in policy  rate by 50bps to 13.75% by Dec 2019.