Introduction to Pakistan’s Bonds

Want to invest your first salary in a safe asset? Want to get paid twice a year without taking on too much risk? Say Hello to Pakistan’s government bonds, an asset devised by the government that is as safe as a house! Well, that’s an overstatement. But the probability of default is quite low. That is because, these bonds are “backed” by the government. Meaning, the government will do anything to pay your money back.

So, should you invest in these bonds? Well, life seldom provides you with a definite answer. Government bonds face a similar situation. Yes, you should because, again, they are safe instruments and you are almost guaranteed a semi-annual payment plus the face value of your investment. No, because you might receive higher returns by investing in the bonds of some of the safest corporations of Pakistan. In short, it depends on how much risk you are willing to take. As your investment buddies, we would recommend that your first investments should be low-risk, this is precisely why we emphasize that you should put some of your eggs in government bonds.

Types of Government Bonds

Government offers two types of bonds: Conventional Bonds and Islamic Ijarah (rental) Sukuk. If you are not comfortable with the interest payments provided through the conventional means, you can always opt for the Islamic model.

One major difference between the two is that the coupon payments in conventional bonds are fixed. However, this is not the case with the Sukuk, which pays the coupon (called profit or rental) based on the profit generated by the government. So, you can end up earning more in some years and less in others.

Some of the other attributes of the two offerings are:

To get a quick preview of the meaning of the terms presented in the table, visit our introductory blog on Government bonds.

How safe are Pakistan’s Bonds?

Some of the “smarties” reading this blog might be wondering, despite all the negative economic news we hear on a daily basis, how on earth are Pakistan’s bonds considered safe? Is there any proof that I can provide to my readers about the stability of these instruments? Well, most of the major rating agencies, who rate government bonds on the basis of their ability to payback their loans, have given Pakistan’s bonds a decent rating.

The table below shows these ratings:

These ratings indicate that Pakistan’s bonds are reasonably safe for the investors. They are not too bad for a developing nation that has just begun to get on the forefront of economic prosperity. Of course, they are not as good as other nations’, but our bond rating few years ago was way worse than what it is right now. Round of applause for the government?

A rating of B indicates that the government is reasonably strong in terms of financial strength. Any rating below that (junk bond status) means that the investors are taking a huge risk investing in bonds of those nations.

Purchasing Government Bonds

Convinced about stuffing some low-risk beauties in your portfolio? Happy to reduce the risk of your investments? Let’s have a look at the ways you can invest in them.

Method 1 – Bidding process – Too much of a Pro

  1. Opening up an Investor Portfolio Securities (IPS) account with a certified primary dealer (investment banks, brokerage houses etc.)
  2. The dealer maintains the IPS account on behalf of the client, even though the client is the sole owner of the bonds
  3. Customers can instruct their dealers to buy bonds directly through the auction, which is held by the State bank of Pakistan. The investor can only bid up to certain amount (0.25% of the total offering or 25 million, whichever is higher)
  4. An investor can only make up to one bid. More than one bid will be discarded by SBP
  5. Once your bid is accepted, the required amount will be deducted from your account in return for the bonds

Method 2 – Secondary Market – Less of A Pro

This process doesn’t go through the “Pro” bidding process. It just involves a few steps:

  1. Open an IPS account with a certified dealer (as mentioned in method 1)
  2. Instruct the dealer to buy the required bonds from the secondary market
  3. The dealer will buy the required bonds for you at the quoted price and debit the money from your account

That seems like a reasonably simple process; however, you have to adhere to the requirement set by the SBP, including but not limited to providing the necessary paperwork in order to register for an account.

Method 3 –Sovereign Mutual funds – The Amateur

This one is certainly for folks like me, who do not prefer complex processes. There are several Mutual Funds in Pakistan that invest solely in Pakistan’s government bonds. They provide a steady stream of income and are a low risk investment.

You can simply buy units of a Mutual Fund that invests in Pakistan’s Government Bonds or Sukuk. All you have to do is:

  • Register an account with a bank that offers a Mutual Fund that invests in a Sovereign Bonds
  • There are plenty of such funds available that allow you to invest for as little as Rs. 500
  • These low risk investments then distribute coupon payments according to the proportion of units held by the investors

Visit our article on Mutual Funds, for more information about the nature of this investment vehicle.

Conclusion

Pakistan’s government bonds bring about an impressive set of attributes for a low-risk investor or someone looking to invest for the first time. Couple those attributes with the fact that investing in them have become increasingly easy in Pakistan’s market. Mutual Funds in particular are extremely easy to work with and information is easily available on the website. So guys what are you waiting for? Go ahead and take the first step!