The significant drop in interest rates, driven by declining inflation, has altered the landscape. The government had previously rejected all bids for treasury bills, signaling its intent to lower borrowing costs, which consume a substantial portion of tax revenue for debt servicing.
Following the rejection of T-bill bids, the interbank market became highly liquid.
The State Bank of Pakistan reported that in Thursday’s fixed local currency bond/PIB auction, the government secured Rs83.3 billion, falling short of the Rs200 billion target. The return on the three-year bond was reduced by 335 basis points to 12.9%.
This indicates an improvement in the government's liquidity position, commented Topline Securities.
Notably, the cut-off yields on three-year bonds fell to 12.9% from 21%, on five-year bonds to 13.4% from 18%, and on ten-year bonds to 13.2% from 16.6% within a year.
While long-term borrowing may offer temporary relief by deferring immediate payments, it poses a substantial long-term burden on the economy. PIBs represent the largest portion of the government’s domestic debt.
It is crucial to establish a solid yield curve for the bond market. The rejection of yesterday’s T-bills auction positively impacted the market. The surplus liquidity and anticipated yield declines led to a substantial allocation in longer tenors, creating a more balanced yield curve, said Faisal Mamsa, CEO of Tresmark.
Governments have been accumulating long-term PIBs to defer immediate payments, leading to a large volume of PIBs within domestic debt.
As of July, the central government’s total domestic debt was Rs47.7 trillion, with PIBs accounting for Rs28.15 trillion.
Yields significantly decreased in today’s auction, with the three-year tenor experiencing a 335 basis points cut to 12.9% (the lowest since March 2022) and the five-year tenor seeing a 190 basis points reduction to 13.4% (the lowest since November 2022), reported Arif Habib Ltd. The auction also included a two-year PIB with a cut-off yield of 13.98%.
The financial market is keenly observing the trend for the next T-bills auction following the sharp decline in PIB rates and anticipating further interest rate adjustments.
The SBP has reduced its policy rate from 22% to 17.5% in three reviews since June. The business community is calling for an additional 300 basis points cut to stimulate economic activity, though the central bank remains cautious.
