In a landmark move, the government has unveiled plans for a Tbills buyback (treasury) worth Rs500 billion, set to take place. This initiative aims to reduce expensive domestic debt and lower interest payments following the recent acquisition of a relatively low-cost $7 billion International Monetary Fund (IMF) loan program.
The T-bills buyback serves as a strong signal to financial markets, showcasing the government’s improved cash position. The Ministry of Finance intends to utilize these surplus funds to rapidly decrease interest rates, manage domestic debt more effectively, and create fiscal space to support economic growth.
AKD Securities Director of Research, Muhammad Awais Ashraf, stated, “A 1% reduction in the interest rate would reduce interest expenses by an impressive Rs470 billion annually.”
Currently, the rate of return on 1-year Tbills (treasury) has decreased by 9 percentage points to 14%, down from a recent peak of 23%, as the central bank’s key interest rate cut coincided with inflation falling to single digits for the first time in three years.
Pakistan’s total debt stands at Rs69.6 trillion, with domestic debt amounting to Rs47.7 trillion. Of this domestic debt, approximately Rs31 trillion is owed to commercial banks, which have invested heavily in T-bills and Pakistan Investment Bonds (PIBs). The Tbills (treasury) buyback will also enable commercial banks to reduce their borrowing from the central bank, which has reached a record Rs12 trillion.
Topline Securities CEO, Muhammad Sohail, highlighted that the government’s decision to repurchase its T-bills for the first time is a significant development. He noted that this reflects an enhanced cash position with various positive implications for the economy.
The notable decline in yields—1-year T-bills have fallen from 23% to around 14%, and the 10-year bond from 17% to 12.7%—indicates a faster-than-expected easing of interest rates. This strategic T-bills buyback (treasury) is expected to enhance liquidity in the money market, driving yields lower and improving the government’s debt metrics.
By repurchasing its debt, the government can optimize its debt profile, potentially reducing the overall debt ratio. This action also signals confidence in the fiscal position, benefiting short-term money market operations and long-term fiscal sustainability. Lower yields could promote greater investor confidence, encouraging private-sector investment and stimulating economic growth.
T-bill (treasury) yields have decreased by nearly 500 basis points in under three months, driven by strong central bank profits and enhanced fiscal discipline. These improvements have bolstered government cash flows and liquidity in the money market, reducing the need for borrowing and creating a more stable economic outlook.
The government invited bids (through Bloomberg) for a Rs500 billion buyback auction of Market Treasury Bills (MTBs). The auction will see the government repurchase Rs100 billion worth of T-bills issued on June 13, 2024, maturing in December 2024, as well as Rs100 billion from T-bills issued on December 14, 2023. Additionally, it aims to repurchase Rs150 billion worth of sovereign bonds issued on June 27, 2024, and Rs150 billion in bonds issued on December 18, 2023.
The government retains the right to reject bids without explanation. Ashraf further noted that government liquidity has improved significantly following a record-high profit of Rs4 trillion reported by the central bank for the fiscal year ending June 30, 2024. Out of this, Rs2.7 trillion was transferred to the government, as per existing regulations.
This T-bills (treasury) buyback may also prompt the central bank to further reduce its key interest rate to bolster business and economic growth. The bank has already cut rates by 4.50 percentage points since June 2024, bringing the current rate to 17.5%. Research projections suggest the rate may fall to 14-15% by the end of the fiscal year on June 30, 2025.
The buyback could encourage commercial banks to offer new financing to the government in future T-bill auctions at lower interest rates. Moreover, the increased availability of financing might lead banks to provide more loans to the private sector, thereby raising their advance-to-deposit ratio (ADR) above 50% to avoid facing additional taxes of up to 19%.
