The Central Bank of Iran’s February 17 decision to issue rial certificates of deposit with 20% rates made bonds traded with 15-17% YTMs simply a less attractive investment.
Unsurprisingly, investors flocked to purchase the CDs and 1.01 quadrillion rials ($22.5 billion) of them were sold during the first week of the initiative.
CBI had announced that the 20% CDs–which offer rates 5% higher than the current deposit rates–will be sold for only two weeks, meaning that their sale should cease by Thursday’s close, Financial Tribune reported.
The limited CD sale, according to CBI, was meant to quash a weeks-long US dollar rally against the rial that had wreaked havoc in the foreign exchange market. It was part of a package that also contained issuance of rial-based forex bonds and presale of gold coins at attractive prices.
At the height of the forex market volatility and just before the unveiling of the CBI package, the rial was traded at 49,000 against the greenback, having plunged 14% since the start of 2017.
Yet the public’s general feeling is that the high-rate certificates are a precursor of permanently rising deposit interest rates.
And that is what the recent fluctuation in the debt market is showing with yields rising over the 15% they had balanced in the third quarter of the current fiscal year (Sept. 23-Dec. 21).
“TB251” had its first appearance on the over-the-counter exchange on Tuesday, with the two-year bond’s price being discovered at 715,000 rials ($16) each by the day’s close. ITB’s total issuance volume is over 17 million with a nominal value of 1,000,000 rials ($22.3) and is set to mature on Jan. 6, 2020. Its yield to maturity, according to IFB data, is at 19.83%.
Another two-year ITB “TB261” was also traded at IFB on Wednesday with its price reaching 740,999 rials ($16.5), making its YTM 19.27%.
The bond market also experienced a meaningful growth at IFB last month (Jan. 21-Feb. 19) with debt security trade value growing 56% to 13 quadrillion rials ($288.8 million) compared to the month before. Average trade value jumped to 620 billion rials ($13.77 million) during the month, rising 55% month-on-month.
Most of the month’s upticks expectedly happened during its closing days when the CBI package was revealed.
ITBs' yields are expected to grow even further as, according to Government Spokesman Mohammad Baqer Nobakht, bonds with 20.5% YTMs will be issued as of Saturday and the CBI's two-week deadline for issuing certificates of deposits will come to an end.
What may come up is anyone’s guess. Extending 20% rates beyond their two-week limit will keep monies locked in banks and away from foreign exchange and gold, yet it might prove to be a costly undertaking for banks.
CBI has announced that it will reimburse any losses suffered by banks because of the CDs set higher than current deposit rates.
Keeping deposit rates at 15% could also open floodgates and trigger chaos, again. According to Pouya Jabal-Ameli, an economist with the CBI, the bearish trend in the forex market will continue as long as interest rates stay high.