JS Securities Limited - JS Research.

Karachi -- September 20, 2022 (PPI-OT)

Dissecting the negative yield curve

Pakistan's yield curve, which was upward sloping till Oct-2021, turned flattish by Apr-2022, moving towards an inversion since then, widening the most in at least two decades. While inverted yield curves are relatively short-lived, the last time Pakistan witnessed the same lasted for nine months, in 2019-2020.

This is not a different phenomenon when compared to other countries owing to global inflation pressures and recession fears. At present, more than 15 countries have an inverted yield curve, out of which most are A or higher rated countries by S and P.

As lower economic growth also correlates with inverted curves, Pakistan has begun to witness early signs of lower large-scale growth. This could further be dampened by impacts from the flash floods, significantly reducing FY23E GDP growth.

Inverted yield curve expands most in at least 2 decades

Pakistan's yield curve, which was upward sloping till Oct-2021, turned flattish by Apr-2022, moving towards an inversion since then. The spread is not only reflecting a higher near-term inflation trend which is expected to normalize in the longer term, but has widened the most in at least two decades.

A similar case is also reflected in Pakistan's international bond yields where earlier maturing bonds (2022/24) are trading at yields close to 45%, while bonds maturing by 2027 and 2031 trade at yields of 20% - 23%. While inverted yield curves are relatively short-lived, the last time Pakistan witnessed the same lasted for nine months, in 2019-2020. This was also when other countries had last witnessed yield-curve inversion, albeit, for varying time intervals.

Global landscape depicts a similar picture

This is not a different phenomenon when compared to other countries owing to global inflation pressures and recession fears. At present, more than 15 countries have an inverted yield curve, out of which most are A or higher...

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