The Market Treasury Bills (MTBs) are short-term debt instrument issued by State Bank of Pakistan (SBP) on behalf of the Government of Pakistan. Presently, the MTBs are available in scripless form and in multiples of Rs. 5000. You can choose from multiple range of tenor i.e. 3 to 6 and 12 months according to you investment planning. MTBs are only redeemable at maturity. However, you can sell MTBs in secondary market through your commercial bank. These MTBs are highly liquid and their redemption is convenient.
MTBs do not pay interest on the par value but are sold at a discount. Thus, their profit / yield is the difference between the purchase price and the face value. At maturity, amount equivalent to face value of the MTB is credited to the account of the investor. For example, if you purchase one 12 months MTB at a discounted price of Rs. 4550. You will get Rs. 5000 at maturity hence a profit of Rs. 450 (9%). Usually, MTBs offer higher return than traditional banking products such as saving accounts.
Another important benefit of MTBs is that they are acceptable by the most banks as collateral for lending. The compulsory zakat on market treasury bills is not deductible at source. On the contrary, income tax is applicable on the profit amount.
MTBs are considered as risk free investment or zero credit risk as they are back by sovereign guarantee of the government of Pakistan and the primary custodian being the SBP. Know about other risk free investment avenues by clicking here.
The SBP holds auctions of MTBs on fortnightly basis on Wednesdays as per approved scheduled issued at the beginning of each quarter. The mechanism for purchase of MTBs is based on bid and offer.
Procedure to Purchase MTBs
You can buy the MTBs either from Primary market of secondary market. We have explained both methods in details below:
1. Opening Investor Portfolio Securities (IPS) Account
First you have to approach any of the Primary Dealers (banks designated by SBP to deal in MTBs) to open IPS account. You can view the list of Primary Dealers here.
The IPS account is mandatory for investing in MTBs. The banks hold MTBs in IPS accounts on behalf of their customers. However, the customer is the actual and legal owner of the MTB held in the IPS account with banks.
If you maintain a PKR denominated bank account already with the bank, you can easily request the bank for opening IPS account. Moreover, the bank maintaining IPS account will provide IPS account activity statements on a quarterly basis.
The Banks levy a small for maintaining IPS account. Each bank has difference amount or percentage which is mentioned in semiannually issued schedule of charges.
2. Purchasing MTBs
After opening the IPS account, you are able to purchase MTBs through two options. One is from the Primary Market through non-competitive bidding process in regular auctions conducted on fortnightly basis. Second is from the Secondary Market.
Through Primary Market
Primary market is a market in where new issues of financial instruments / securities are sold. All fresh MTBs are put up for sale through an auction in primary market. Only the primary dealers participate in this auction. However, other investors can participate through the primary dealers.
The investor can apply for purchase of MTBs through concerned bank for non-competitive bidding process. The bank will review the request according to the requirements of non-competitive bids. However, there a certain limits for non-competitive binding. The quantum of non-competitive bids shall be 0.25% of the auction target or Rs. 25 million, whichever is higher. At the same time, the maximum limit for non-competitive bids is Rs. 500 million.
These bids are sent to SBP separately from the normal bids before commencement of primary auction time. The details of such as name and amount of investors are also mentioned.
A single investor can submit only one bid for a single tenor MTBs. The bid may face rejection if more than one bid is submitted for a single tenor.
These yield on these bids is based on the weighted average yield in each tenor as decided in the primary auction.
Once the bids are accepted, the approved / accepted quantity of MTBs will be transferred to IPS account maintained with the bank.
Through Secondary Market
If you are unable to take part in the primary auction or your bid has been rejected, you can purchase the MTBs from secondary market. It is a market for buying and selling securities in the period between their issue and maturity or the MTBs that have already been issued. The major secondary market players are the primary dealers.
For the purpose, you will approach the primary dealer bank to buy MTBs. The bank will provide indicative yield rates according to tenure and amount invested. Once agreed, you will provide acceptance to the Bank and confirm the transaction.
Subsequently, the bank debits investment amount directly from the bank account, and the instrument will be reflected in your IPS account.
Procedure for Non-Resident Investors
Like local investors, Non-resident Pakistanis can also invest in MTBs. Such investors will have to open additional bank account called Special Convertible Rupee Account (SCRA). This will enable the investor to remit foreign currency through the bank and receive credit in Pakistani Rupee.
However, the remaining procedure is similar to that of local investor.
Current Profit / Yield Rates
The Government of Pakistan decides the cut-off yields and accept amount on the same day.
Further, the yield or profit rate of MTBs is generally near to the policy rate of SBP. The yield rate of last auctions held on May 6, 2020 was 8.3879% per annum for 3 months bills. For 6 months bills, the yield rate was 7.9997% per annum. Similarly, the yield rate of 12 months treasury bills was 7.7500% per annum. The total amount of Rs. 504 billion was accepted in the cited auctions against a total bid amount of Rs. 1,450 billion.
In case you want to invest in MTBs, the next auction for market treasury bills will be held on May 20, 2020.
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