Investment in Government Securities (MTBs/PIBs) in Pakistan

Government securities are a safe and stable investment choice for individuals and institutions seeking diversification of their portfolios and predictable return. In Pakistan, the most prominent government securities are the Market Treasury Bills (MTBs) and Pakistan Investment Bonds (PIBs). Such instruments are issued by the Government of Pakistan, thereby assuring a minimal default risk while serving various investment needs. 

An excellent investment for investors who would like professional management of their portfolio is a government securities fund. Such funds accumulate investments to buy government securities with diversified exposures under professional management but in minimal risk.

Understanding Government Securities

Government securities are debt instruments, which the Government of Pakistan issues to raise funds. These securities are low-risk investments due to government backing. Investors can participate in government securities through two primary markets:

• Primary Market: Securities are purchased directly during auctions conducted by the State Bank of Pakistan (SBP).

• Secondary Market: Securities are traded among investors, such as banks, after their initial issuance.

Key types of government securities include:

• Market Treasury Bills (MTBs)

• Pakistan Investment Bonds (PIBs)

• Government Ijara Sukuk

• Market Treasury Bills (MTBs): MTBs are short-term securities issued by the Government of Pakistan with tenors of 3, 6, and 12 months. These securities are ideal for investors seeking short-term investment options with predictable returns.

Key Features of MTBs:

• Denomination: Available in multiples of PKR 5,000.

• Cash Flow: Balloon payment at maturity, encompassing both the principal and profit.

• Price: Issued at a discount to face value.

• Auction Schedule: Held biweekly, with schedules published by the SBP.

• Profit: The profit is inherent in the difference between the buying price and redemption at face value.

• Custody: Maintained in the IPS account by banks or the SBP.

MTBs are widely known for their safety and liquidity. The latest yields for 3, 6, and 12-month tenors are accessible from the published auction data by the SBP.

Pakistan Investment Bonds (PIBs)

PIBs are long-term instruments with tenors ranging from 3 to 20 years, generating a regular income stream through semiannual coupon payments. They are meant for investors looking for stability and fixed returns over long periods.

Important Features of PIBs:

• Face Value: Issued in multiples of PKR 100,000.

• Cash Flow: Bullet payments with periodic fixed coupon payments and face value redemption at maturity.

• Price: Traded at either a discount or premium based on market conditions.

• Auction Schedule: Held monthly. Announced quarterly by the SBP

• Profit: Coupon payments and a chance for capital gains if sold prior to maturity

• Custody: Held in IPS accounts maintained by the SBP or scheduled banks

PIBs have long-term financial security, and can be traded over the secondary market, affording investors flexibility.

Investment in Government Securities

An Investor Portfolio Securities account is required for the investment of MTBs and PIBs. To open one:

Open an IPS Account

• For opening an IPS account, go to any scheduled bank at which you hold a PKR account.

• Fill out the application form for an IPS account in addition to the following requirements.

• The Treasury department of that bank will process your application.

Buy/Sell Security

• You can obtain a price quote of the desired security through your bank branch.

• Attach duly filled transaction form once you confirm acceptance of quoted price.

• After vetting, the transaction is performed along with your receipt of the IPS statement.

Participation in SBP Auctions:

• Non-Competitive Bids: To be placed at the weighted average price obtained in accepted bids for given term

• Competitive Bids: To be placed for desired rate by you at which it may be accepted by SBP

Transfers of Securities:

• Obtain a transfer form and give it to your bank.

• Transfer is executed through RTGS (Real-Time Gross Settlement).

Activity Statements:

• You can get an IPS activity statement free of cost from your bank, if requested.

Non-resident investors must open a Special Convertible Rupee Account (SCRA). Investments are in PKR and redemption proceeds can be repatriated after converting them to foreign currency.

Advantages of Government Securities

Government securities have many benefits, hence it is a popular investment option:

• Safety: Being supported by the government, these securities are low-risk investments.

• Liquidity: An active secondary market ensures easy trading of securities for investors.

• Predictable Returns: Coupon payments and maturity amounts are well fixed and provide financial stability.

• Flexibility: Options of short and long tenors suit different investment preferences.

• Islamic Options: Investors can opt for either conventional or Islamic (Ijara Sukuk) securities.

Key Considerations

Government securities are safe; however, investors should note the following:

• Market Risk: Selling before maturity may result in gains or losses due to interest rate fluctuations.

• Taxation: Income tax is deducted at maturity, as per prevailing laws.

• Fees: IPS service charges and transfer fees may apply.

Bottom Line

MTBs and PIBs can be very safe investments for individual and institutional investors in Pakistan. Provided one understands them well, there is scope for stable finances and a long-term increase in investment in government securities. Government securities will always provide a strong backbone for a solid investment portfolio through direct investment or through funds managed for the investors. Check out JS Bank for investment opportunities.