Govt. bond auction record participation 3-Year yield 14.25pc

Islamabad, July 25, 2019: Government of Pakistan (GOP) conducted first Pakistan Investment Bonds (PIBs) auction yesterday after signing IMF program, wherein tenor wise the govt. collected Rs120 billion, Rs55 billion and Rs25 billion in 3-year, 5-year and 10-year bonds at cut-off rates of 14.25 percent, 13.8 percent, and 13.55 percent respectively.

According to Topline report, The cut-off rates were up by 55bps for 3-year bonds and remained unchanged for a 5-year bond. However, for 10-year bond rates were down by 15bps compared to the previous auction held on Jun 26, 2019.

Out of total participation of Rs700 billion, the govt. fetched Rs201 billion (29 percent of the bid amount) in fixed-rate PIBs. In 10-Year floater PIBs bond, the govt. raised Rs84 billion out of total participation of Rs128 billion at 75bps above the benchmark rate.

Cumulatively Govt. raised Rs285 billion in yesterday’s auction. This was the second-largest auction in the last 5 years.

The higher participation and rates of 13-14 percent 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 was also conducted by PML N govt. (please see next slide) during 1H2014 where around Rs1.8-2.0 trillion were raised by Govt. to meet IMF requirement of shifting borrowings from SBP to commercial banks or other investors.

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We believe, today’s auction is also in response to IMF’s criteria of lengthening the maturity profile of government loans and shift of borrowings from SBP to commercial banks and other investors.

The 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 a further hike in the policy rate by 50bps to 13.75 percent by Dec 2019.

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