There is a cat and mouse game going on between the Debt Office at Ministry of Finance and banks (mainly top banks’ treasury offices). Lately, banks have been bidding at high rates while government wants to accept at lower rates. That is why in recent auctions, there was virtually no acceptance beyond 6M T-bills. There are divergent views (based on behavior) on inflation and interest rates outlook – market expects interest rates to move up within 6-12 months, while the MoF sees inflation in control and rates to stay at current levels.

It seems clear that market is trying to manipulate the government and that too, not for the first time. Whenever the government is in the IMF programme and there is a push from the Fund to improve the government debt maturity profile through issuing more long-term bonds, the market tries to milk it through booking in bonds at peaking rates. Not to mention, interest rates are usually on the higher side within early days of any Fund programme.

But when the rates come down amid lesser pressure from the IMF, market refrains from participation. It is pertinent to note that it is not a true market. It is an exclusive club of 4-5 big banks’ treasures (or sponsors in case of Seth-owned banks) who use (some would say abuse) the power to earn good money at the cost of taxpayers at large.

In the past, government did not use to have ammunition to counterattack. There are examples in recent history – Rs2 trillion plus bonds were issued in 2014 at 12 percent or more when market-based rates were 8 percent. In 2019, over Rs1 trillion bonds were issued at 14 percent plus rates when the market rate was 12-13 percent.

Now with market rates down to 7 percent, no bank is willing to buy fixed rate bonds at 8.5 percent. They ask for higher rates. Either the government has to scrap the auctions or has to buy at higher rates. But that is not the case with higher issuance of floaters – the right ammunition at MoF debt office. In the past four months, around Rs1 trillion worth of floating 3-10-year bonds are being issued. If the banks are not buying fixed rates at market prevailing rates, the government is better off issuing floaters.

For the last four-decades, inflation in Pakistan has averaged at 8.1 percent. The 6M T-Bill auction averaged at 9.1 percent for past 20 years. The floating bond is issued at 50 bps over 6MTbill. Thus based on it, government’s average cost for long term bonds should be around 9.6 percent. But the exclusive bankers’ club tried to make a killing by buying bonds at peaking rates when the government was under IMF’s pressure. And refrain in good time.

Some say this is market phenomenon. But how can one term it a market when key participants can be counted on fingers in a flash? The reason they won in the past is because they had the right weapons while government was working on age old guns. Now the government has got good guns. It is time to enjoy the fight. Stay tuned.