On May 18, the SBP will be conducting its 34th Pakistan Investment Bonds (PIB) auction. The auction target amount is Rs 10 billion for 3, 5 and 10 years PIB. Coupon has been revised from 6 percent, 7 percent and 8 percent to 9.10 percent, 9.30 percent and 9.60 percent, respectively.
In the current fiscal year, long-term bonds worth Rs 22 billion have matured, and if we combine it with last FY 2004-05, total amount of maturity in two years should be around Rs 35 billion. Last successful bidding of Pakistan Investment Bonds for 3 years, 5 years and 10 year was held on May 29, 2004 and the total accepted amount was Rs 14.858 billion. Since then, the State Bank of Pakistan has rejected three PIB auctions held on August 18, 2004, November 12, 2004 and March 28, 2005.
Some activity has been noticed in the bond market after a lapse of 24 months, which is encouraging. Market estimates that so far in all three tenors, banks have sold bonds worth Rs 1 billion in 'when and if issued' script. But continuity is required for healthier growth and development of bond market. Bonds auction should be held at regular intervals. Continuity of regular PIB auction with firm future commitment would help the corporates to manage their cash flows with a greater degree of comfort.
In the coming PIB auction, banks may be less keen to show interest for investment purposes, as majority of them are already stuck up with the old purchase of government paper at lower yield. Holding of PIB's by banks in held-to-maturity is of approximately Rs 85 billion. Another factor that could discourage banks to invest in the coming long-term bond auction is the absence of appropriate yield benchmarking, which has shattered their confidence in the bond market, hence, activity is very thin.
Bond investors could well be divided in their opinion on yield, due to the recently announced lower inflation number, as there is not enough clarity on the future inflation trend. But the size of PIB auction is reasonably good to cater to the need of insurance companies, pension funds and corporates to invest their funds or to hedge their gaps.
A rough estimate suggests that in Pakistan, the amount of provident fund money collected during the month is around Rs 1 billion, or Rs 12 billion annually, it is generally preferred that these funds are invested in Pakistan Investment Bonds. According to a primary dealer, it's a big opportunity for the corporates and insurance companies to gulp a large chunk of PIBs through the 'when and if issued script', as they have the appetite to digest a sizeable amount. In a thin market it would be difficult for the banks to quote a price for a big amount because of the illiquid bond market, and the fact that pass through is also not allowed.
Furthermore, since insurance companies have to honour claims and give bonus, which is capped at 8 percent, they have to diversify their investments. They can invest up to a maximum of 40 percent of their funds in the equity market. They do invest in the real estate market but to manage cash flows, large amounts are deposited in banks and a sizeable amount is invested in government securities to plug their gaps.
Despite a revision of coupons 'when and if issued' govt paper has been traded at a discount of 20 to 30 basis points. 3-year tenor was dealt at a yield of 9.40 percent, 5 years at a yield of 9.60 percent, and 10-year paper at yield of 9.80 percent.
Money market dealers believe that PIB auction could be a success story, but since corporates are not allowed a pass through bid, it poses a big hurdle for bond auction. Therefore, the pass through bid issue needs to be resolved, as banks or corporates will not violate SBP regulations.
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