The latest Pakistan Investment Bonds Auction raised Rs639 billion on Friday, significantly exceeding the Rs300 billion target, as banks aggressively invested in long-term government papers following the State Bank’s decision to keep interest rates steady.
Despite a real interest rate spread of approximately 7 percent, the difference between the 11 percent policy rate and prevailing inflation, banks continued to favour long-tenor bonds. This aggressive participation in the Pakistan Investment Bonds Auction reflects expectations that interest rates will remain elevated for an extended period, prompting financial institutions to lock in higher yields.
However, this sizeable margin has become a contentious issue for traders and industrialists, who are advocating for a sharp policy rate cut to ease borrowing costs. In Friday’s auction, the cut-off yields for 2-year, 3-year, and 5-year PIBs increased by 5 to 24 basis points, indicating the market’s sentiment that the interest rate policy may stay unchanged despite inflationary variations. Conversely, the yield for 15-year bonds was reduced by 5 basis points.
The auction’s largest tranche came from 15-year PIBs, where Rs300 billion was raised at a cut-off yield of 12.45 percent. Interestingly, all bids for this tenor were rejected in the previous auction on July 14. The second-largest amount, Rs221 billion, was raised through 10-year bonds at a slightly lower yield of 12.15 percent, compared to 12.20 percent in the prior auction.
Govt Raises Rs118bn from Short-Term PIBs
Additionally, the government secured Rs28 billion from 2-year bonds at an 11.09 percent yield, Rs47 billion from 3-year bonds at 11.14 percent, and Rs43 billion from 5-year bonds at 11.44 percent. The most significant increase of 24 basis points was observed in the 2-year PIBs.
The strong participation in the Pakistan Investment Bonds Auction underscored the ample liquidity within the banking sector, with total bids amounting to Rs2.034 trillion. While elevated interest rates allow banks to profit from risk-free government securities, they simultaneously escalate borrowing costs for both the private sector and the government.
A financial expert highlighted that a 1 percent reduction in interest rates could save the government Rs1 trillion in debt servicing costs. “By lowering the policy rate from 22 percent to 11 percent in FY25, the government has already saved trillions in interest payments,” he said.
The government’s focus on long-term borrowing through PIBs reflects a strategic shift aimed at minimizing refinancing risks and reducing the immediate pressure of short-term debt servicing obligations.