Pakistan bond yields hit near 2.5-year low

September 24, 2024 (MLN): Pakistan’s bond yields have plummeted to their lowest level in up to 2.5 years following an aggressive policy rate cut, with the rejection of all bids in last week’s auction for Market Treasury Bills (MTBs) further intensifying the decline.

To be precise, yields are down to their lowest level in 28 months for the 1-year bond, 29 months for the 3-year bond, and approximately 23 months for the 5-year and 10-year ones.

The 1-year, 3-year, 5-year, and 10-year PKRv-based yields stand at 14.59%, 13.22%, 12.88% and 12.6%, respectively as of Monday.

This represents a sharp drop ranging from 382 to 972 basis points across different tenures from their peak reached in the first half of September 2023, with the 1-year one facing the largest drop of 972bps.

Secondary market yields started to pivot ever since inflation figures slowed to a 20-month low in February, which strengthened market participants' bets that the State Bank of Pakistan (SBP) would initiate rate cuts soon to stimulate the economy.

The disinflation trend continued in later months and the consumer price index (CPI) for May eased to 11.8% YoY, in light of which, the central bank lowered the policy rate by 150 basis points, marking the first reduction in nearly four years and exceeding market analysts' expectations.

Subsequently, in July, the policy rate was further cut by 100 basis points to 19.5%.

Recently, the inflation figure for August clocked in at 9.6% YoY, the first single-digit inflation since October 2021. 

This gave Pakistan’s central bank enough room to surprise market participants by declaring an unexpected 200bps cut in its last meeting held on September 12, 2024.

With the policy rate already down by 450bps since June 2024, the bond yields were set to plunge. It is worth mentioning here that since the first rate cut, secondary market yields dropped under the range of 134 to 465bps.

Interestingly, the primary factor contributing to the significant decline in yields in recent sessions has been the unexpected rejection of bids for MTBs and floating rate Pakistan Investment Bonds (PIBs).

As per the annual borrowing plan for FY25, the government aims to carry out zero net issuance through T-Bills, with the maturities to be rolled over that are to be financed through long-term government securities, such as PIBs and Government Ijara Sukuk.

Therefore, while the rejection of bids may raise concerns, it was not entirely unexpected.

This showcased the government's step to improve its liquidity position by reducing its borrowing costs which are one of the largest drains on the country's resources.

With excess liquidity in the market and hopes of yields falling at a faster pace, participants parked their bids to purchase fixed PIBs in the auction held the day after the T-Bill auction.

However, the central bank accepted only Rs110.96 billion out of the Rs630.865bn in bids, significantly falling short of its target of Rs200bn.

Cut-off yields plunged by 335bps for the 3-year bonds, while the 5-year one faced a reduction of 190bps, settling at 12.8995% and 13.4% respectively.

As a direct consequence, yields continue to take steps back with eyes on the next auction that will provide more insights.

In addition to meeting the financing requirement, the government also aims to increase the average time to maturity of domestic debt in line with the MTDS targets.

Looking ahead, price gains are anticipated to ease further as September’s reading is likely to fall to 7.5% over the prior year.

As a result, the central bank would vigorously sustain its monetary easing cycle, cutting the policy rate by a greater margin to boost economic activity and achieve the overall GDP growth target.

Accordingly, yields are foreseen to fall further, benefitting stock valuations, as the discount factor used to compute future cash flows to present value would decrease, enhancing their appeal to investors.

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