10-, 5-year Pakistan Investment Bonds trading at all-time high

KARACHI (November 27 2002) : Pakistan Investment Bonds (PIBs) having maturity of ten and five years are trading at all-time high prices in just over a week after cut in the discount rate by the central bank to 7.5 percent from 9 percent.

Too much money is chasing too few government bonds in Pakistan. The treasury market in Pakistan is continuously rallying since July 2001 when SBP started slashing its discount rate from 14 percent.

The bonds did not lose their steam, rather they gained momentum in the last couple of weeks with discount rate now at 7.5 percent.

Amid ample rupee liquidity, coupled with limited investment alternatives, the financial institutions, insurance companies, etc are putting their funds desperately in government securities.

Muhammad Sohail, head of research at Invest Capital Securities said that after recent 1.5 percent rate cut, it was expected that 10-year PIBs would settle down between 8-9 percent. However, SBP's decision to postpone the November bond auction signalled its reluctance to borrow aggressively through such auctions. Since December 2000, when PIBs were launched, SBP has borrowed over Rs 150 billion through PIBs only.

This decision created a bull-run in short and long term government bonds that are now traded at all time high prices.

Amid rumours of another discount rate cut in near future, 10-year PIB (Oct 24, 2002 issue) touched Rs 126.75, translating into yield of 7.1 percent.

Similarly, 5-year PIB is at around 6.1 percent, while repo rate of 6-month T- Bill hovers around 4.5 percent.

The bullish traders in the local inter-bank market are quoting Indian case to justify their investment strategy. Like Pakistan, India is also witnessing excessive liquidity (amid low inflation of below targeted 4 percent) due to rising dollar inflows after Sep 11, 2001 events.

Moreover, in India also, the central bank is buying dollars from the market where Indian rupee is trading at 1- month high against the US dollar. For Since the time when the Indian central bank last month slashed the rate by 25 basis points to revive drought ridden Indian economy, 10-year bond has gained around 60-70 basis points and touched a life record of 6.4 percent.

Sohail said that inter-bank market might settle down after an outflow on account of upcoming T-Bills auction (on November 27 with target of Rs 20 billion) and Eid withdrawals. However, there is an urgent need to adequately sterilise the liquidity in the money market, because during current FY03 (July to November 8), scheduled banks demand and time liability has increased by Rs 48 billion with no growth in their credits, signifying that all money is finding its way into securities and that too largely in government securities.

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