Foreign inflows into Pakistan debt hit six-month high

Pakistan began the new calendar year with record foreign investment in government debt, as overseas inflows into treasury bills topped $114 million during the first 16 days of January, according to data released by the State Bank of Pakistan.

The central bank said January marked the highest monthly foreign inflow into domestic bonds in more than six and a half months, reflecting strong investor appetite for short-term government securities despite declining yields.

Data showed foreign investors poured $114.7 million into treasury bills in the first half of the month, while outflows totaled $18.5 million.

By contrast, the equity market attracted inflows of just $17 million against outflows of $61.5 million over the same period.

During the first six and a half months of the current fiscal year, total foreign inflows into treasury bills reached $625 million, compared with outflows of $408 million.

Equity market inflows stood at $164 million, while outflows amounted to $459 million.

FDI falls sharply

Foreign direct investment, however, fell sharply. FDI declined 43% in the first half of the fiscal year to $808 million, down from $1.425 billion in the same period a year earlier.

Despite a buoyant stock market, foreign investors continued to favor government bonds, particularly treasury bills, while equities recorded persistent net foreign outflows.

In the past two treasury bill auctions, yields on short-term bonds fell into single-digit territory for the first time in more than four years.

Cutoff yields for three- and six-month treasury bills slipped below 10%, a level last seen in November 2021, while the 12-month paper cleared marginally above that mark.

The latest auction saw cutoff yields at 8.9995% for three-month bills, 9.9492% for six-month bills and 10.001% for 12-month bills, representing a roughly 4.2-year low across tenors.

Yields have declined cumulatively by 59 basis points on one- and three-month bills, 53 basis points on six-month bills and 49 basis points on 12-month bills across the last two auctions.

Analysts said the broad-based decline reflects easing inflation expectations, ample liquidity and a dovish monetary policy outlook.
The government’s ability to raise funds well above auction targets underscored favorable financing conditions.

The State Bank cut treasury bill rates by up to 31 basis points in auctions held on Jan. 8 and Jan. 21, pushing most yields into single digits, except for the 12-month paper, which remains at about 10%.

Who invested?

Financial experts attributed the strong inflows largely to exchange rate stability, which has improved investor confidence in repatriating capital and profits amid expectations of limited movement in the rupee.

Bahrain led inflows in early January with $48 million, followed by Singapore at $28 million, the United Arab Emirates at $15 million and the United Kingdom at $13 million.

Some economists also pointed to perceived macroeconomic stability. Faisal Mamsa, chief executive of Tresmark, said inflation was falling, foreign exchange reserves were improving and the benchmark KSE-100 index was nearing 190,000 points, though he warned that economic growth remained weak and export performance stagnant.

A research report by Topline Securities said that Pakistan’s economic indicators in 2025 reflected a broad-based recovery, supported by easing inflation, improving macro stability, and a strong rebound in domestic demand.

High-frequency indicators were led by robust growth in autos, cement, motorcycles, and truck sales, alongside steady power generation and petroleum demand.

On the macro front, inflation fell sharply, averaging at 3.5%, enabling monetary easing with 6M T-bill yields declining to an average 11.2%. Record remittances of $40bn, improving FX reserves, and 10% LSM growth underpinned economic resilience, while the KSE-100 Index surged 51% on improved sentiment.

However, external pressures persisted with a modest current account deficit and softer FDI inflows.