Bond yields on a downward path

By on December 24, 2021 0

KARACHI:

Yields on government debt securities have been falling in both primary and secondary markets over the past week, as they have accumulated a 22-65 basis point (bps) decline on three-month to 10-year bonds after the authorities took action. to correct an “unwarranted” increase in returns.

Yields fell 15 to 25 basis points on three to 10 year Pakistani investment bonds (GDP) in the secondary market on Friday following the announcement that the board of directors of the International Monetary Fund (IMF ) would consider resuming its lending program in Pakistan on January 12, 2022.

Limit yields largely peaked at a three- to 12-month Treasury bill auction held ahead of the tightening of monetary policy on December 14, 2021. At that time, the Prime Minister’s advisor on finance and income , Shuakat Tarin, had warned banks that they were charging unnecessarily high yields and the government would take action to fix rates if financial institutions failed to rationalize them.

The State Bank of Pakistan (SBP) had also noticed the unnecessary rise in yields and said in its latest monetary policy statement that “in all the big names, secondary market yields, benchmark rates and cutoff rates in government auctions have increased significantly. ”

The MPC (Monetary Policy Committee) noted that the increase seemed unwarranted, he said.

Banks were apparently speculating on yields amid a record import bill, around $ 8 billion, and inflation high to 11.5% in November 2021.

The high yields have increased the cost of borrowing for the government as it occasionally borrows from commercial banks to finance the budget deficit. The government auctions the bonds to borrow money.

The three-month Treasury bill yield fell 57 basis points to 10.21% in the secondary market on Friday since hitting a recent high of 10.79%. Six-month Treasury bill yields fell 51 basis points to 10.9% in the secondary market from its peak. Likewise, 12-month Treasury bill yields fell 22 basis points to 11.54% from its historically high value, according to data compiled by Ismail Iqbal Securities.

Three-year Pakistan investment bond (GDP) yields fell 65 basis points to 11.3% in the secondary market on Friday. On five-year GDP, it fell 63 basis points to 11.37%. 10-year GDP yields plunged 61 basis points to 11.66% in the secondary market, the data showed.

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“The latest drop in secondary market yields came after the finance ministry spokesman tweeted that the Sixth (Pakistani Economy) Review will be presented to the IMF Board of Directors on January 12, 2022,” said Ismail Iqbal Securities, head of research, Fahad Rauf.

The IMF would release the next tranche of about $ 1 billion under the loan program after approval by its board. Previously, the government had reached an agreement at the staff level on the resumption of the bailout which had been on hold since June 2021.

“The receipt of the next tranche of the IMF loan should be followed by refinancing of other foreign debts and increased inflows from bilateral and multilateral lenders,” he said in an interview with The Express Tribune. “The proceeds will strengthen the country’s foreign exchange reserves and improve Pakistan’s ability to make international payments. “

“The improvement of the national economy always helps to reduce bond yields,” he said.

Previously, bond yields had peaked due to uncertainty surrounding the resumption of the IMF program.

In addition, other economic indicators such as inflation reading and import bill are expected to decline in the current month and in the future. “If the environment remains favorable, the central bank will keep the benchmark interest rate unchanged in its monetary policy announcements in January and March,” he said.

When yields were not falling in the primary and secondary markets, SBP injected 1.7 trillion rupees by inviting the longest 63-day fixed-rate open market operation (OMO) “to signal that the rate of benchmark interest would remain stable in January monetary policy. political, ”he said.

“The OMO (injection) has helped dampen the yields of Treasuries and GDPs in both primary and secondary markets,” he said.

Previously, the central bank hiked the interest rate by 275 basis points in three meetings from October to December 2021 to take it to 9.75% at present.

The rate was increased to control inflation and reduce the import bill.

Posted in The Express Tribune, December 24e, 2021.

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