PIB Auction Result: Confirmation of Economic Recession or SBP Desperation?

Penned by: Muzammil Aslam

May 30, 2019 (MLN): May 29th's PIB auction outcome has surprised many treasuries. The general anticipation was that the Government of Pakistan may ignore the yields and focus on raising long-dated bonds to 1) improve debt maturity profile and 2) retire SBP borrowing to fulfil IMF’s prior conditions.

However, the auction outcome has surprised many participants on account of cutoffs and amount realized. 3-year cutoff came in at 13.69%, followed by 13.80% in 5-year, and 13.60% in 10- year.

Clearly the yield curve is now inverted. Another interesting thing was that the investors preferred to lock a decent amount in long-dated bond 10-years than 5-years. SBP lifted PRs25 in 10 years compared to PRs64bn in 5-years. Overall PRs141bn realized vs 100bn target.

What does inverted yield curve indicate?

To explain inverted yield curve, we are recreating some parts of an interesting article published on inverted yield curve in Forbes during May.

“An inverted yield curve is typically known to forecast a recession. According to JP Morgan, inverted yield curves have often been precursors to recessions.

Now, the yield curve has inverted. This means investors’ demand for long-term investments has risen, and they’ve bid down the returns. In contrast, yields (i.e. your returns) on short-term investments have risen because promoters have had to offer increased yields to pull investors in. Simply put: Short-term yields have risen above long-term yields. This often signals investors are pessimistic about the economy in the short term. They are bracing for negative news.

In business, for example, an inverted yield curve could signal that sales might slow and share prices might drop. Commercial credit could also tighten, or at least become more expensive. As a result, this would impact spending, leasing and hiring decisions, as well as corporate investments. For independent professionals such as doctors or other business owners, it throws up a warning to evaluate personal investments”

So is the economy in recession or on its way there?

We believe, Pakistan is already in recession and the inverted yield curve is already delayed by 3 months. In contrast equities have preempted the recession from March onwards. Market has priced in the slowdown and the inflationary expectations.

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