What was the buying spree all about?
The year 2014 started on a mixed note for the Pakistan economy. Some of the negatives inherited from 2013 included: headline inflation notably picking up, foreign exchange reserves dwindling to precariously low levels exerting pressure on the rupee, interest rates rising to double digits following an increase in policy rate and tighter liquidity conditions. However, completely defying the earlier said negatives and to some extent, economic fundamentals, the stock market extended the earlier gains and hit new highs with the benchmark KSE-100 Index rising by 5,345 points or 27 percent to 25,261 level since May 2013 general elections.
At the start of 2014, the million dollar question was how the domestic financial markets would perform. As investors hunted for yields, Pakistan Investment Bonds (PIBs) ascertained to be the trophy. PIBs are medium to long term government securities ranging from 3 to 30 years issued by the government. For the first time in Pakistan, banks and local investors have invested a record Rs2.2tr in the PIB auctions (9M2014).
Banks with larger book size remained most active in the buying extravaganza that took place in June 2014. It was not only the temptation for high yields but an added oomph for lending funds without the menace of delinquency
The buying spree
With a gloomy CPI (consumer price index) number of 9.18 percent and hostile macroeconomic indicators in January, the yields of sovereign bonds plunged incorporating the added risk factor. The maximum yields recorded during the year were 12.52%, 12.93% and 13.45% offering a fixed coupon rate of 11.25%, 11.50% and 12.00% for 3, 5 and 10 years respectively. Return famished investors did not take long to capture this opportunity and that is when we saw a buying spree. The money market floor went bizarre! This was the first time ever I saw the verso, of perceived to be composed and unruffled, money market. Speculations, rumours and the buy buy, sell, sell stock gimmicks started dictating money market yields that sprung up and down erratically.
Banks with larger book size remained most active in the buying extravaganza that took place in June 2014. It was not only the temptation for high yields but an added oomph for lending funds without the menace of delinquency. PIB investments of ABL shot up to Rs179bn (562% up YoY), UBL at Rs245bn (96% up), NBP at Rs278bn (266% up) and HBL at Rs224bn (145% up).
What was this panic buying all about?
The PIB saga unfolded later in October, when on the back of a global meltdown in crude oil prices (Oct14: 14%MoM and Nov14: 20%MoM) the CPI took a nose dive (3.96% Nov14) forcing the discount rate to cut 50bps. Resultantly, the lower CPI dragged down the money market yields offering the PIB investors heavy gains. The yields on 10-Year PIBs declined at a slower pace than medium and short-term yields. 10-Year PIBs yield fell by 92bps to 11.65% while 5-Year and 3 Year PIBs yields dropped by 151bps and 120bps respectively. During the said period, 11 PIB auctions were conducted with a total target of 880bn and a massive participation of Rs.2.7tr was observed against the target while the acceptance was Rs2.35tr. Moreover, Treasury Bills yields were down by a 40 bps, 38bps and 50bps for the tenor of 3-Month, 6-Month & 12-Month respectively. The government conducted 24 T-Bills auctions and accepted Rs4.24tr cumulatively in all tenors.
The PIB saga unfolded later in October, when on the back of a global meltdown in crude oil prices (Oct14: 14%MoM and Nov14: 20%MoM) the CPI took a nose dive (3.96% Nov14) forcing the discount rate to cut 50bps
The secret recipe
However, this engaging break did not come as a surprise to me. To recall, the yield spread (6-month T-bill versus 3-year PIB), which averaged 57bps during 2009-13, had widened to 246bps during the year. It is to note that such a wide spread between the DR and the long term bonds has never been created in the history of Pakistan. The only cause behind this spread was government’s move to re-profile its debt from short to long term due to IMF guidelines. There was an empirical evidence of market correction. Now, only two odds could shrink this hailing spread: either, the discount rate going up to 13%-14% (which was highly improbable through the contemporary regime) or the yields to drop down to an ingenuous level. The latter evicted to be the obvious riposte.
During this period of colossal yield oscillation in PIBs, investors regarded it as the safest investment haven with a sizeable return that guarantees principal protection; hence a mounting momentum of secondary and primary market trade was realised.
As the inflation rate is expected to remain subdued with the outlook remaining positive on the foreign reserves front, we may see SBP to slash the discount further in the upcoming MPS in mid-January. Investors must consider PIBs and T-Bills as a promising investment prospect still alive.
