Government raises PKR 160 billion in Sukuk auction as strong demand signals further SBP rate cuts

The government raised PKR 160 billion through its latest auction of Government Ijarah Sukuk (GIS) and Government Hybrid Sukuk (GHS), exceeding its PKR 150 billion target as overwhelming investor demand reflected expectations of further monetary easing by the State Bank of Pakistan (SBP).

According to the auction results, total investor participation reached PKR 653 billion, more than 4.3 times the auction target, highlighting strong appetite for medium-term government securities as investors sought to lock in current returns ahead of any additional policy rate cuts.

Strong demand enables higher borrowing

The government accepted PKR 159 billion in competitive bids and PKR 1 billion in non-competitive bids, raising PKR 10 billion more than initially planned.

Analysts said the higher acceptance showed the government took advantage of favorable financing conditions, particularly in the three-year and five-year floating-rate Sukuk, while extending the maturity profile of its domestic debt amid declining interest rates.

Rental rates decline sharply

The cut-off rental for the three-year floating-rate Government Hybrid Sukuk fell 70 basis points to 11.3994%, from 12.10% in the previous auction.

The five-year floating-rate Sukuk recorded a cut-off rental of 11.58%, down 51 basis points from 12.09% in the previous auction.

The 10-year Government Ijarah Sukuk cleared at 12.15%, leaving a spread of about 75 basis points over the three-year instrument and resulting in a relatively flat yield curve.

Analysts said the narrow spread suggests investors expect interest rates to remain broadly within the 10% to 11% range over the medium term, rather than anticipating either aggressive monetary easing or a renewed surge in inflation.

Limited acceptance in 10-year Sukuk

Despite the strong overall auction, investor interest in the 10-year Sukuk remained relatively subdued.

Participation totaled PKR 57 billion, compared with PKR 319 billion for the three-year tenor and PKR 274 billion for the five-year tenor.

The government accepted only PKR 8.36 billion, meeting about 17% of the PKR 50 billion target.

Market participants said the limited acceptance suggests either the government considered investors' required yields too expensive or investors were reluctant to commit funds for a decade at 12.15%, expecting borrowing costs to decline further in the coming months.

Signal for monetary policy

The auction results reinforce market expectations that the SBP's monetary easing cycle is not yet complete. Strong demand for medium-term Sukuk and lower cut-off rentals suggest investors are positioning for lower interest rates, while the government continues to capitalize on improving borrowing conditions by securing longer-term funding at reduced costs.