Pakistan Investment Bonds

With the harbingers of interest rate outlook quiet for some time, the market participation level and bidding pattern in the first PIB auction of the last quarter, held a week ago, was identical to the auctions held in the previous quarter.
Banking on liquidity in the market and appetite for long-term papers, the auction drew the participation to target ratio of around 2.13. Money market dealers attributed the healthy participation to corporate buying, such as insurance companies and pension funds.
"Investors are reaping good return on long tenor bonds, with YTM standing at around 14 percent, and would also book capital gains if interest rates decline from the current level", according to one money market dealer.
The participation pattern remained in line with the historical trend, with most of the participation in 3-year, 5-year and 10-year bond, attracting nearly 22 percent, 11 percent and 61 percent, respectively, of the total participation of around Rs 42.5 billion.
Despite the overwhelming market response, however, the government closely followed its target plan, as they accepted bids close to Rs23 billion. The successful bids belong to only three renowned long-tenure government bonds, as the government rejected 7-year, 15-year, 20-year and 30-year bond. The 10 year paper alone accounted for 62 percent of the accepted bids (amount), while cut-off yield eased down by 2bps to 14.09 percent. The cut-off yield on 3-year and 5-year paper fell by 8bps and 4bps, respectively.
As the stability in the interest rate scenario has assuaged price risk fears; the government has set a higher pre-auction target for the fourth quarter. The government is aiming to raise a total of Rs 60 billion from all three auctions scheduled in the last quarter as against pre-auction target of Rs35 billion in the third quarter and Rs 85 billion in the first half of the FY11.
Besides, the pre-auction target also stands at a relatively high level against Rs25 billion of PIBs scheduled to retire in the current quarter, according to market sources.
The improved participation level, in the third quarter, has given confidence to target more investors in the last quarter. But, still the contribution of t-bill in the government financing portfolio is much higher than long tenure bonds.