Debt Market Return Increases Amid Interest Rate Growth Speculations

EghtesadOnline: Iran’s debt market is witnessing a creeping growth in its yield to maturity over the trading of a new batch of Islamic Treasury Bills on Iran Fara Bourse.

News ID: ۷۸۱۶۹۰

07 February 2018

About 76,000 of the new batch of 17 million ITBs priced at 865,000 rials each with the ticker “TB191” were traded at IFB on Monday. Their YTM reaches up to 17.5% considering their price and are bound to mature in January 2019.

This is while average debt market YTM stayed below 15% in the last few weeks, as demand for debt securities dwindled amid gold and forex markets offering better alternatives to investors.

The uptick in YTMs seems to stem from market speculation that bank deposit rates are set to rebound in the coming days, the Persian daily Donya-e-Eqtesad said.

Both market logic and historical trend in Iran’s money and debt market convey that the two follow each other in dealing with risk-free investment options, according to Financial Tribune.

The Central Bank of Iran announced in September 2017 that all banks and credit institutions have to set their one-year deposits and short-term interest rates at 15% and 10% respectively. All deposits made after this motion went into effect were affected and non-compliers were warned of penalization.

Deposit rates were already cut back in June 2017. Long-term deposit rates went from 18% to 15% with short-term rates set at approximately 10%. Many lenders failed to comply with that however, with rates reaching 22%-plus when hidden fees were accounted for. CBI’s last week directive was mostly meant to enforce the earlier decision.

ITB rates followed suit. They were fluctuating above 20% in the fiscal year’s Q2, with returns on so-called Sakhab bonds reaching up to 30%. They quietly melted down in the last six months, however, to stand around 15%.

Now, why would bank rates rebound after having been painstakingly cut down?

What nourishes the speculation is that the recent gold and forex rallies, which are bound to make the housing market bullish too in the medium term, have intensified the liquidity flow away from other markets.

As with previous years, foreign exchange rates surged in December 2017, which also coincided with the end of the third quarter of the Iranian year when seasonal demand increases as Iranians travel abroad. However, this year’s rally has been more intense and lasted longer.

The rial dropped to around 46,500 against the dollar in the open market in late January from 37,700 in mid-2017. Rial continued to drop to record lows against the US dollar on Sunday, ending a short spell of stability that held for only a few days after the government assured the public that volatility in the foreign exchange market was temporary.

On Monday, a day before President Hassan Rouhani was scheduled to hold a press conference, it was slightly down but bullish at 47,400, according to Tehran Gold and Jewelry Union’s website.

Last week, Iran’s stock market was down on all fronts. Tehran Stock Exchange’s main index TEDPIX shed 1,389 points or 1.4% during the week that ended on Jan. 31 to drop down to 98,133.5. The downtick for the smaller over-the-exchange market Iran Fara Bourse was less pronounced, as IFX lost 0.9 points or 0.1% during the week to stand at 1,089.4.