After two weeks of moderate success, the weekly bond auction, held by the Central Bank of Iran on behalf of the government, failed to attract buyers.
The government barely sold 7.3 trillion rials worth of bonds to banks, financial institutions and retail investors on Tuesday – down 61% compared to last week, according to data published on the CBI website.
Relatively better performance in the past two weeks had boosted hopes for financing the government budget deficit in a “noninflationary manner”. The government sold debt worth 105 trillion rials in the previous two auctions.
Main buyers this week were two banks that put in bids worth 6.4 trillion rials. Retail and institutional investors in the equity market contributed to 13% of the total purchase with 1.3 trillion rials, the lowest contribution in the past six weeks.
To plug its ballooning deficit holes, the government started selling Islamic bonds in May via weekly auctions but investors have shown little, if any, interest.
In late August, the Governor of Central Bank of Iran Akbar Komijani expressed concern about methods of financing the government’s deficit spending, stressing the need for concerted efforts to expand the use of bonds to compensate revenue shortfalls.
“Given the limited earnings from bond sale in the present fiscal year and the government’s reliance on CBI for funds, increase in monetary aggregates and inflation is highly probable,” he said.
Komijani said the government needs a change of approach to financing the budget, adding that measures must be taken to attract buyers to the debt market.
“Under present conditions, the government needs to raise yields, diversify bonds and maturity dates, and employ market markers [to boost liquidity of securities in the secondary market], he recommended.
The maximum yield the Economy Ministry has so far offered on bonds is less than 22% for 2023 maturity. This is not attractive for investors of fixed income bonds in an economy grappling with inflation at 50% and above.
