The yields on long-term, of three-, five-, and 10-year, bonds last week fell nearly 40 basis points following the statement Dr Ashfaque Hassan Khan made that Pakistan Investment Bonds auction had been scrapped. The JS PGBI, which is the primary indicator of Pakistan Bond Market, showed a decrease of 1.4441 points over the week, bringing the index value to 90.2919 with a weighted index yield of 9.2318 percent on June 18, 2005.
The JS PGBI has shown an overall decrease of 9.7081 percent since its inception on July 1, 2004, and a fall of 8.3452 percent since December 31, 2004.
According to a report prepared by Salman Jafri of Jahangir Siddiqui Capital Markets, last week bond market was fairly volatile. The benchmark 10-year paper fell to 9.78 percent from 10.19 percent a week ago. The reason for the fall, attributed by most dealers, was the statement by the Economic Advisor to the Finance Ministry in which the auction of PIBs, to be held in this quarter, was effectively scrapped.
The 3- and 5-year PIB yields also fell from 8.95 percent and 9.33 percent, respectively, to 8.58 percent and 8.93 percent. The JS PGBI, which was encountering resistance at the 89 point level, broke through the resistance very convincingly to stand at 90.2919.
The money market remained slightly tight during the week witnessing two days of discounting as banks resorted to borrowing from the State Bank's discount window at 9 percent. The SBP picked up total Rs 42.8 billion in three Open Market Operations in the week. The maturities of all three OMOs will coincide with an expected auction settlement of Treasury Bills on June 23, 2005.
The overnight market remained in the 6.5 percent to 8.9 percent range, with one-, three- and six-month repo rates at 7 percent, 7.5 percent and 7.9 percent, respectively. The next two weeks are likely to remain volatile with the fiscal year-end very near and the last auction of T-Bills for this fiscal year expected to be held in the next week.
"The increases in Treasury Bill yields are expected by most market participants to continue for another 3- to 6-month before we are anywhere near an inflation-neutral rate. The PIB auction, scheduled to take place this quarter, has effectively been shelved, regardless of the impact of such a decision on the local currency yield curve. The shelving of this auction does not necessarily indicate that there will be no further auctions. Just that the government may want to wait it out a bit before announcing another auction. Most dealers expect a sizeable auction of PIBs within the first quarter of FY06."
Rumours of a Discount Rate hike were again doing the rounds, with the SBP expected to increase cut-offs again in the T-Bill auction next week. Participation in this auction was expected to remain skewed towards the 3-month T-bill with significantly smaller amounts expected to be offered in the 6-month and 12-month tenors.
A breach of the 8 percent level in the 6-month cut-off and the 8.5 percent level in the 12-month cut-off will in all probability lead to a minimum of 1 percent increase in the SBP discount rate, although the increase is not likely before July 2005. Most banks are expected to re-classify the 'Held-to-maturity' instruments in their portfolios and book their losses in the beginning of the next fiscal year. Selling off of PIBs by the corporate sector has already been seen as the realisation that rates are not likely to come down very soon. "We are expecting the long-term bond yields to move upward between now and mid-July with negligible demand for these instruments being the key factor and inflation levels not likely to subside any time soon.
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