The central bank in its 37th Pakistan Investment Bond (PIB) auction, the third in the current fiscal year, while reopening of previous issues accepted bids worth Rs 15.15 billion against its target amount of Rs 15 billion. The total amount offered was Rs 56.025 billion.
For the three-year bonds the accepted amount was Rs 2.45 billion at a cut-off yield of 9.3629 percent against the market offer of Rs 11.825 billion. In the five-year group, it accepted Rs 3.4 billion against the market offer of Rs 14.325 billion at a cut-off yield of 9.7652 percent. In the 10-year category, against market offer of Rs 19.675 billion, it accepted Rs 9 billion at a cut-off yield of 10.1988 percent. In the 15-year bonds the accepted amount was Rs 300 million at a cut-off yield of 10.9815 percent against offered amount of Rs 2.2 billion. In the 20- and 30-year bonds, bids were rejected despite participation of Rs 4 billion in each tenor by a large corporate house.
The SBP rejected the 20- and 30-year bids, as the starting point of the bids in these tenors was slightly higher than in the last option. In contrast, the bid for 10-year PIBs was lowered by 33 basis points. Acceptance of the 20- and 30-year offers, therefore would have caused confusion. Market experts feel that in the next PIB auction, bids for 20 and 30 years would now be lower.
Overall consensus on the reopening of previous issue is positive for the bond market. It brings more liquidity and is beneficial for the market participants as it brings finer pricing. Besides Rs 15.15 billion, the government received an additional amount of Rs 1.8 billion due to the reopening of old issues plus Rs 700 million in non-competitive bids.
The central bank's decision to stay within its auction target amount is encouraging for the market development and market participants, it also suggests that the SBP is in no mood to get influenced by the external factor.
Just like the previous PIB auction, about 80 percent of the accepted offers are from corporates who are now favourably looking at PIBs compared to investment in NSS schemes in order to avail themselves of capital gain.
The largest offers were said to be from State Life (Rs 12 billion), EOBI in the range of Rs 7/8 billion, KPT Rs 1.5 billion besides asset management companies and private sector corporates like Pakistan Tobacco and Mobilink.
Bond dealers were perplexed on hearing the participation amount, which was huge in terms of size. On the settlement day Tuesday, March 6, there will be a PIB maturity of Rs 5.88 billion, whereas on Monday, March 5, the first working day of the week there was discounting of Rs 5.8 billion. So the big question is: Why is the market participating in PIBs with such a huge amount?
Advances to deposit ratio being in the range of 75 to 80 percent in most banks coupled with a slowdown in credit growth to Rs 232 billion in the current fiscal year as against Rs 294 billion in the comparable seven and a half months of the last fiscal year, and FDI receipts and revenue collection, higher than estimated in the Federal Budget, banks are apprehending government's appetite for borrowing to be lower in the current fiscal year. Another factor is that there is no change in NSS rates, this year. Market players after not hearing of a change by the Ministry of Finance could have decided to shift their portfolios towards government securities. But looking at the bidding pattern, there is a high probability that asset management companies and investment banks are keen to build their portfolios in government paper. This shift in investment policy could be due to signs of nervousness in the domestic stock market, which has so far lost 1147 points after the KSE index hitting the day's high of 11844 on February 9 to close at 10,900 on March 5.
A leading dealer of a local bank was of the view that since there was a strong flow of funds government would not be requiring money right away. A CEO of a fund said growth in private sector credit has also come down a bit. The other possibility is that this could be an early sign of recession.
The slump seen in the global stock market following a worldwide drop in stock prices last week, the market witnessed the US 10-year bond gaining sharply by 31 basis point, as investors ran to cover their assets. US 10-year treasury yield fell from 4.77 percent to 4.46 percent.
The treasury head of a foreign bank said, "I think this huge offer in the PIB auction was due to the increase in the inflow in home remittances, which adds another billion dollars" - Rs 60 billion. This means banks' deposit and time liability (DTL) has increased substantially. It also indicates growth in size of banks' balance sheets.
A primary dealer said the SBP did the wise thing by not accepting large amounts. The timing could have been disastrous for our equity market, which is already taken a dip due to liquidity shortage. Accepting above the target amount could have had a sever impact in the market due to liquidity crunch. Meanwhile, soon after the auction no major trade was reported: the 3-year bond was quoted at 9.30/22, 5-year at 9.60/50 and 10-year at 10.05/00.