PIBs Auction: Modest hike in yields on NSS likely, adverse for equities

February 6, 2020 (MLN): The upwelling in the yields of Pakistan Investment Bonds (PIBs), in a recent auction held on February 04, 2020, may pave the way for a modest hike in the yields on National Saving Schemes (NSS), effective from March 01, 2020, says a report by AL Habib Capital Markets.

This indicates that the recent surge in yields may not bode well for the equity market as the hike in yields of alternate instruments like NSS likely to make equity market less attractive for the investors.

In a recent auction, Weighted Average Yield (WAY) for 3-years PIBS surged by 24bps to 11.96%; 5-Year PIBs were higher by 25bps to 11.34% and 10-Year PIBs were up by 8bps to 10.96%, compared to the preceding PIB auction held on January 08, 2020.

According to the report, the thin participation by financial institutions in the auction indicating the two important scenarios. First, the appetite of the financial institution to lock their funds at current yields has slashed as they may be foreseeing a possible upward hike in interest rates going forward.

Secondly, Central Bank’s willingness to mop up lesser funds at current rates indicating higher participation/acceptance of bids by the SBP in the upcoming T-Bills’ auction of Feb 12, 2020, the report underscored.

Extending the analysis by examining the relationship between yields of PIBs and NSS instruments, the graphs below based on the historical data over the past almost two years gathered by the brokerage house, in which the yields of Special Saving Certificates (SSC)/Special Saving Accounts (SSA) are compared with 3-Year PIBs; Regular Income Certificates (RIC) with 5-Year PIBs; Defence Saving Certificates (DSC) and Behbood Saving Certificates (BSC)/Pensioner Benefit Account (PBA) are compared with 10-Year PIBs. The trend clearly suggests that the profit rates on NSS are pegged with the auction yield of PIBs.

Hence, based on the strong relationship between yields of PIBs and NSS instruments which is clearly visible from the graphs above, it is pragmatic to say that the modest hike in yields on NSS instruments is likely.

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