Central bank may cut coupon rate: 5-, 10-year PIBs yields at lowest

KARACHI (December 16 2002) : The yields on 10-year and five-year Pakistan Investment Bonds in the debt market are at the lowest, indicating that the central bank might cut coupon rate by as much as 250 basis points.

The coupon rate on 10-year bond is 11 percent, on five-year 10 percent, and on 3-year nine percent.

An analyst said that the rate cut is expected as after the cut in discount rate by 1.5 percent last month to 7.5 percent, a record low, the yields on these bonds fell considerably, indicating to market participants that the coupon rate is due to fall.

The Pakistan Investment Bonds of 10 years (October 24, 2002 issue with a coupon rate of 11 percent) are trading at record high levels of close to Rs 134, yielding as low as 6.35 percent.

Before the announcement of cut in discount rate, the ten-year bond was trading at 9 percent. This bond has jumped by around 21 percent in less than two months (that, is since its auction).

Similarly, the five-year bond was trading at 5.62 percent, from 7.90 percent almost two months back whose coupon rate is 10 percent.

Analysts viewed that before the rate cut the difference between the coupon rate and yield offered in the market was around 200 basis points, which showed that the rate cut would be in proportion to the present trading levels of these government papers.

They said that recently State Bank of Pakistan Governor, Dr Ishrat Hussain, in an interview, clarified that they are not planning further cut in discount rate. It looks like that interbank market has totally ignored that statement amid mounting liquidity with lower inflation.

This is not surprising considering the plethoric liquidity in market, absence of new issues, recent exorbitant slash in the discount rate and dearth of investment avenues that have marked the local markets. Too much money is chasing too few investment options and only fresh issues and new investment avenues can bring some stability in the government bond market.

The six-month treasury bills witnessed a second cut of 40 basis points to 4.45 percent last week. It should not be taken as a surprise as this has been anticipated after 150 basis points cut in the discount rate. Soon after this cut the six-month treasury bills fell from 6.37 percent to 4.84 percent. In the last two auctions, the central bank has raised Rs 38 billion.

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