Auction for PIBs: SBP rejects all bids as banks play safe

Following the directives of the Ministry of Finance, the State Bank of Pakistan (SBP) Wednesday rejected all bids for long-term investment bonds squashing market anticipation of higher interest rate. As per already announced schedule, the State Bank conducted the auction for Pakistan Investment Bonds (PIBs) for 3-, 5-, 10-, and 20-year maturity on May 18, 2016 to raise some Rs 50 billion for the federal government to meet its financial requirements.
Overall, the participation in the auction was very thin compared to last auction as the SBP received bids amounting to Rs 82.625 billion with a realised value of Rs 83.65 billion for the sale of 3-year, 5-year and 10-year long-term government papers, however no bid was received for 20-year PIBs. "Banks were very cautious in this auction as they bid average 10-30 basis points higher than the last auction, therefore, the SBP decided to reject bids to squash anticipation of higher interest rate," said Faisal, Chief Executive Officer of Landmark Capital.
He said yields were higher across the yield curve. In addition, as the discount rate is standing at lower side, financial institutions are more interested in bidding for shorter term paper than longer term, he added. Faisal said during the last month, the ministry also rejected all bids of Market Treasury Bills and the reason is the same that bids were received with higher margin of up to 32 bps.
Analysts said as presently, the SBP's key interest rate is at its lowest level, banks are avoiding making investment in long-term bonds particularly in 20-year variety. Similarly, most of the bids were received for 3-year, which fetched bids amounting to Rs 44.77 billion. Some Rs 27.969 billion bids were submitted for 5-year and Rs 11.180 billion for 10-year.
Market sources said banks and financial institutions were seeking up to 30 basis points (bps) higher interest rate on PIBs in the auction held on Wednesday compared to last auction held on April 20, 2016. As the margin was higher than previous auction, the ministry of finance decided to reject all bids and not to borrow on higher rates. In the last auction of PIBs, the federal government borrowed some Rs 136 billion through the auction for 3-, 5- and 10-year bonds at a cut-off yield of 6.5492 percent, 6.9997 percent and 8.1804 percent, respectively.