Collapsing bond yields upping the optimism

September 27, 2024 (MLN): Economic sentiments have turned around in a jiffy. Once it was confirmed that Pakistan had successfully arranged the external financing needed for the IMF bailout package, things turned around quickly.

Executive Board of IMF meeting was announced and approved, SBP cut interest rates by 2%, the government rejected the T Bill auction, the exchequer received hefty SBP profits, the PIB auction resulted in bond yields below 13% and now the government of Pakistan is contemplating buyback of T Bills. 

Interestingly, 1 Year T Bills yields have also collapsed from highs of 25% 12 months ago to close to 14% these days. These are good days for borrowers - the government itself is the heaviest borrower - and will lead to much-needed interest cost savings in the form of fiscal deficit.

While the country is not out of the woods yet only a few quarters ago pundits had expressed Pakistan's disappearance into the abyss, risk of spiralling currency depreciation and fear of bankruptcy. 

While that has been averted structural issues remain formidable and require immediate attention. PIA's privatization would remain the first litmus test and should pave the way for further private sector takeover of loss-making DISCOs to save taxpayers' money from being squandered away.

Additionally, FBR's energized push to nab tax evaders and go after non-filers is injecting optimism back into the economy expected to grow at 2.5-3% this fiscal year. 

Risk-free money market investors would be forced to invest in riskier avenues such as equities and properties as post-tax and fee returns of money market funds plunge to 11-12%.

There are plenty of defensive stocks and sectors offering double-digit dividend yields on the index that investors should consider for their wealth management targets.

This is by no means the end but a very timely material U-turn back to growth. Let's hope the pace continues. 

The author is an independent economic analyst and writes on Twitter and Linkedin.

Disclaimer: The views and analysis in this article are the opinions of the author and are for informational purposes only. It is not intended to be financial or investment advice and should not be the basis for making financial decisions.