The cash-strapped federal and provincial governments would be borrowing over Rs1.07 trillion during the second quarter of the current fiscal year, shows the Auction Target Calendar released by the central bank Friday. The analysts see yields for the previously heavily-weighted government papers like the Pakistan Investment Bonds (PIBs) sliding to months low as the bond market continues to rally in the crises-hit country.
According to SBP, the resource-constrained government would borrow over Rs1.07 trillion from the risk-averse banking system during October-December FY2011-12 through selling short and long-term government securities.
The regulator said of the targeted amount, some Rs1.025 trillion would be raised through the auction of the three, six and 12-month Market Treasury Bills (MTBs) while the remaining Rs45 billion would be borrowed through the sale of PIBs to be matured in 3, 5, 7, 10, 15, 20 and 30-year periods. The current quarterly calendar shows an amount of Rs72.891 billion under the head of “additional requirement” the government would be raising from the banks during the second quarter. The analysts believe that the bond market was rallying in the country as investors were anticipating a possible cut in the price of bank borrowings to be unveiled by the State Bank on the 7th of October.
“In anticipation of the cut in the policy rate amid expected slowdown in inflation, the benchmark 10-year PIB traded around 12.99 per cent yesterday, a level unseen in last 14-months,” viewed Mohammad Sohail, chief executive officer of Topline Securities.
The analyst observed that during last four months the yield for PIBs had fallen by approximately 125 basis points.
Further delay in the issuance of PIBs to resolve the lingering issue of circular debt also helped in the latest uptrend in the prices of PIBs, he added.
He said during first nine months of Fiscal Year 2011 the most traded issue of 10-year bond had rallied 16 per cent, inclusive of the interest, at a time when the equities market provided a negative return of three per cent.
“This trend of bonds beating equities in 2011 is in line with global trend where risk-averse investors have moved to bond market due to fear of recession in major economies,” Sohail noted.
The analyst believes that the present declining yield on PIBs boded well for the local stocks and that, theoretically speaking, as a 100 bps cut fall in the bonds’ yield would increase the equity values by 8 per cent, “assuming no earnings growth”.
On the other hand, he said, this trend showed that the money was flowing to the bonds market from the equities.
