KARACHI: The government, in a bid to meet its financing needs, raised 193 billion rupees by auctioning fixed-rate Pakistani investment bonds, with threshold yields on three-, five- and 10-year papers tending on the upside, central bank data showed Wednesday.
The auction target was 100 billion rupees.
The three-year GDP yield rose 115 basis points (bps) to 11.8500%, the five-year paper yield rose 100 bps to 11.7497% and the 10-year paper rate jumped 88 bps. at 11.7418%.
The State Bank of Pakistan (SBP) said it sold 54 billion rupees of three-year papers and 80 billion rupees of five-year papers and 59 billion rupees of 10-year papers.
The government rejected offers for 15- and 20-year GDPs. In addition, no offers were received for the 30-year BIPs.
“In today’s auction, a huge Rs 589 billion stake was recorded against a target of Rs 100 billion, likely due to the flattening/inverting of the yield curve in a backdrop of an oil price reversal and an expectation of lower inflation going forward,” brokerage firm Topline Securities said in a research note.
Why is the yield curve flattening and what does this mean?
Analysts said the yield curve in Pakistan has flattened and started to invert. This shows that shorter dated securities offer attractive yields and higher ones are more in demand than longer ones.
Market participants expect inflation to fall and interest rates not to rise. Bond traders expect this despite a volatile trend in global commodity prices, geopolitical tensions and consumer price index inflation in the country hit 12.2% in February.
However, at the same time, macroeconomic fundamentals such as rising current account deficit, weakening rupee and depleted foreign exchange reserves point to higher interest rates by the SBP.
The SBP kept the policy rate unchanged at 9.75% in the January and March reviews due to the improving outlook for inflation.
Inflation is expected to decline in the last quarter of this fiscal year, due to the high base effect, analysts said. Global oil and other commodities are also set to see a reversal if the Russia-Ukraine conflict ends and the Federal Reserve raises rates.
The government also accepts higher rates by banks on GDP as it needs financing to finance the budget deficit in a situation where no financing is available from the central bank due to IMF restrictions.