Fall in long-tenure PIB yields to bode well for stock valuations

August 22, 2019: The Government of Pakistan conducted an auction of Pakistan Investment Bonds (PIBs) yesterday. This was the second auction after signing IMF program wherein Govt. borrowed Rs 414.55 billion, Rs55 billion and Rs 25 billion in 3-year, 5-year and 10-year bonds at cut-off rates of 14.25%, 13.55%, and 13.15% respectively.

The cut off yield remained unchanged for 3-year bond, however, for 5-year and 10-year bond, cut off yields fell by 25bps and 40bps, respectively.

According to the research note by Topline Securities, cumulatively the Govt. has raised Rs 821.5 billion in last two auction after signing IMF program and Yesterday’s auction was amongst the largest auctions conducted during the IMF program.

This immense participation and decline in longer tenure yields hint that investors want to lock in their funds at current yields as they believe rates may come down due to falling inflation and lower Govt. Appetite, said a report.

However, if the inflation exceeds beyond SBP projections of 11-12%, things could change.

Meanwhile, another research report by Insight Securities reveals that if Govt. decides to increase indirect taxes to beef up revenues, inflation could quickly ramp up, changing the interest rate scenario as well. Overall this bodes well for equities, as fall in longer term yields would increase stock valuations.

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