The government raised Rs639 billion through the auction of Pakistan Investment Bonds (PIBs) on Friday, surpassing the Rs300 billion target. This strong demand came amid an unchanged interest rate by the State Bank of Pakistan, reflecting continued bank interest in long-term investment papers.
Despite a real interest rate of approximately 7% — based on the 11% policy rate and current inflation — banks continued to show strong interest in long-tenor bonds. This indicates expectations that interest rates may remain elevated for an extended period.
However, this situation has sparked concerns among traders and industrialists who are advocating for a substantial rate cut to ease borrowing costs.Â
The cut-off yields for 2-, 3-, and 5-year PIBs rose by 5 to 24 basis points, signaling that interest rates may remain steady despite fluctuations in inflation. In contrast, the yield for 15-year bonds dropped by 5 basis points.
The largest share, Rs300 billion, was raised from 15-year PIBs at a yield of 12.45%. Notably, all bids for this tenor were rejected during the previous auction on July 14. The second-highest amount, Rs221 billion, was secured through 10-year PIBs at a yield of 12.15%, slightly lower than the 12.20% recorded in the previous auction.
Additionally, the government raised Rs28 billion, Rs47 billion, and Rs43 billion from 2-, 3-, and 5-year PIBs at yields of 11.09%, 11.14%, and 11.44%, respectively. The two-year PIBs recorded the largest increase in yield — 24 basis points.
The high participation in the auction reflected significant liquidity in the banking system, with total bids amounting to Rs2.034 trillion. While higher interest rates benefit banks by enabling them to earn more from risk-free government securities, the elevated borrowing costs pose challenges for both the private sector and the government.
A financial expert pointed out that a 1% cut in interest rates could save the government up to Rs1 trillion in debt servicing. He noted that the reduction in the policy rate from 22% to 11% in FY25 had already resulted in significant savings in interest payments.
The government’s preference for long-term borrowing through PIBs signals a strategic move to avoid frequent refinancing and ease short-term debt servicing pressures.
