The federal government raised some Rs 285 billion through the sale of long-term investment bonds. The massive borrowing shows that the government is shifting its borrowings from the State Bank to commercial banks following the IMF condition.
On behalf of the federal government, the State Bank of Pakistan (SBP) Wednesday conducted two auctions for Pakistan Investment Bonds (PIBs) Fixed Rate and Floating Rate.
This was the first auction for long-term government papers after obtaining $6 billion International Monetary Fund (IMF) programme. Banks and financial institutions aggressively participated in the auction amid higher policy rate.
Overall, bids amounting to Rs 699 billion with a realized value of Rs 564.840 billion were received for the sale of 3-year, 5-year and 10-year bonds against the target of Rs 100 billion fixed by the government for PIBs Fixed Rate. However, no bid was submitted for 20-year bond.
Out of total participation of Rs 700 billion, the government fetched Rs 201 billion (29 percent of the bid amount) in Fixed Rate PIBs.
The federal government borrowed Rs 120 billion through the sale of 3-year bond, Rs 55 billion against 5-year and Rs 25 billion through 10-year variety at cut-off rates of 14.25 percent, 13.8 percent, and 13.55 percent, respectively.
According to Topline Research, the cut-off rates were up by 55 basis points (bps) for 3-year bond and remained unchanged for 5-year bond. However, for 10-year bond, rates fell by 15 bps compared to previous auction held on June 26, 2019.
In 10-year Floating PIBs, the government raised Rs 84 billion out of total participation of Rs 128 billion at 75bps above the benchmark rate.
Cumulatively, the federal government raised Rs 285 billion in two auctions held on July 24, 2019. This was the second largest auction in last 5 years.
Historically, similar size of auctions were also conducted by PML-N government during first half of 2014 where around Rs 1.8 to Rs 2 trillion were raised by the government to meet IMF requirement of shifting borrowings from the SBP to commercial banks or other investors.
Analysts at Topline believed that this auction was also in response to the IMF criteria of lengthening maturity profile of government loans and shifting of borrowings from SBP to commercial banks.
The yield curve remains inverted in this auction. Lower return on 10-year PIBs compared to 3-year PIBs and 1-year T-bill signals soothing of inflation going forward.
Higher rates in 3-year and 1-year bills reflect that investors seek higher returns against expectations of higher inflation and modest tightening in near terms, analysts added.