Bond yields, Kibor at two-year high

KARACHI: The local money market is witnessing a bearish spell; following a surprise increase in the cutoff yield in the treasury bills and increase in the benchmark lending rate, i.e., Karachi Interbank Offered Rate (Kibor), analysts said.

The analysts at Topline Securities said after a surprise increase in the cutoff yield in the Treasury Bills auction on December 1, 2021, bearish spell has been seen in the local money market.

Bond yields are up 52 basis points in the last two days. The three-year Pakistan Investment Bonds (PIBs) is now near 11.89 per cent, while five-year is at 12 per cent and 10-year is at 12.3 per cent. These levels are being witnessed after 26 months.

Bond yields are up 40 to 55 basis points since the last PIB auction on November 29, 2021, while it is up 145 basis points since the State Bank of Pakistan (SBP) increased the policy rate by 150 basis points on November 19, 2021.

Just to recall, the three-year bond went as low as 8.3 per cent, while the five-year bond’s low was at 9.2 per cent and 10-year bond’s low was at 9.8 per cent.

Similarly, the benchmark lending rate, six-month Kibor, closed at 11.5 per cent on Friday, a level not seen in the last 21 months. This is up 415 basis points from its low of 7.3 per cent.

These sudden changes have happened from the last week after the T-Bills auction on Wednesday. The government in that auction raised Rs504 billion where unexpectedly the cutoff yield on six-month T-Bills yields increased 300 basis points to 11.5 per cent.

This indicates the increased borrowing requirement of government from commercial banks and the likelihood of further hike in the key policy rate.

With the International Monetary Fund (IMF) programme in place, commercial banks offer the largest window for funding the financing requirement of the government, as borrowing from the State bank of Pakistan (SBP) is discouraged, the analysts said.

This is also on account of the deteriorating external account situation of the country and rising inflationary pressures. The increased spread between Kibor and the policy rate has increased significantly to 275 basis points, compared with the last three-year average differential of 50 basis points.

In the upcoming monetary policy statement on December 14, 2021, the analysts expect the SBP to increase the policy rate by 100 basis points to 9.75 per cent.