Flush With Hot Funds in Bills, Pakistan Now Wants Sticky Money

(Bloomberg) -- Having seen global bond investors gorge on its Treasury bills, Pakistan now wants to make its longer-tenor securities palatable to them.

The nation’s central bank is looking at ways to boost liquidity, transparency and improve price discovery in its debt market to make foreign funds stay invested for longer periods. Attracting such sticky money would amplify efforts to turn around an economy saddled with high debt, weak growth and low foreign currency reserves.

The strategy is to create “deeper pockets along the yield curve,” State Bank of Pakistan Governor Reza Baqir said in an interview. “Having deeper segments means that these instruments become more attractive to non-residents as well because they want turnover in the secondary market.”

Global investors have poured $1.2 billion into local-currency bonds in the year that began in July, more than what they invested in the debt in the past four years, central-bank data going back to 2015 show. Funds have rushed in as the central bank more than doubled its policy rate to 13.25% -- the highest in Asia -- and as the nation saw multiple currency devaluations.

The world’s rising pool of negative-yielding debt also boosted the allure of Pakistan’s securities as the government made efforts to improve public finances with support from the International Monetary Fund.

That said, almost all of that money has flown into Treasury bills -- which have a maximum holding period of 1 year. Baqir wants this spilling over to longer tenors. The yield on 10-year bonds has dropped to 10.95%, the lowest in more than a year, according to the Financial Markets Association of Pakistan.

The central bank is working with the finance ministry on a strategy that includes considering bond buybacks, among other measures, he said. “There are many scattered issues from market liquidity and transparency and price discovery,” Baqir said.

Moiz Hussain Ali, country treasurer and head of markets at Citigroup Inc.’s local unit said most of inquiries he has been receiving from overseas clients are about 3-month bills, with some about 1-year paper.

“Investors are coming in the short-term but this was the experience in Egypt, Nigeria, Ukraine and other markets as well,” Ali said in a briefing in Karachi earlier this month. “So first they will try and experience that” and then think about longer investment periods, he added.

To contact the reporter on this story: Faseeh Mangi in Karachi at fmangi@bloomberg.net

To contact the editors responsible for this story: Arijit Ghosh at aghosh@bloomberg.net, Shikhar Balwani

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