Economy, Business And Markets

Islamic Treasury Yields Follow Bank Deposit Rates Downtrend

Islamic Treasury Yields Follow Bank Deposit Rates DowntrendIslamic Treasury Yields Follow Bank Deposit Rates Downtrend

Short-term government bond yields have dropped by over a fifth since last year.

The newly issued Islamic Treasury Bills are following the decline in bank interest rates. In fact, declining borrowing rates are a good sign for Iran’s battered industries, as lower rates allow them to borrow more to finance their operations.

Islamic Treasury Bills were introduced last summer by the administration of President Hassan Rouhani as a means to repay the government’s overdue debt to contractors, especially debt accumulated by the Energy Ministry and the Roads and Urban Development Ministry. The administration gives the bills to creditors in lieu of their debt, which they can redeem at maturity or sell in the secondary market to other buyers.

The issuance of ITBs has been seen as a starting point for creating a government bond market in Iran.

When ITBs were introduced last summer, the six-month bills bore a 24.4% interest rate, as calculated by central bank analyst, Pouya Jabal Ameli.

Boursepress website, along with Donya-e-Eqtesad daily, put the bill’s effective interest at 26.1%. The disparity came in different approaches to calculating the rate on the bills. ITBs have been fashioned after short-term US treasuries. They bear no coupon and are sold at a discount to their face value, making interest calculations slightly difficult for the uninitiated. One group is right and this paper bet on Jabal Ameli who said he had contacted Donya-e-Eqtesad about the snafu.

The government has issued ITBs seven times since last year. Interest on the most recently issued ITBs, their seventh batch, has fallen to 19.5%, according to Boursepress. This means a five percentage point drop in ITB yields in one year. It also means these bills only have a 4.5 percentage point premium over bank deposits, which earn 15% interest on one-year deposits.

ITB yields have been following bank interest rates, which are being cut by the Central Bank of Iran to increase lending. The CBI is lowering interest rates to get cash to businesses that have run into financial problems as a result of the recent economic downturn.

Though some analysts have warned of a rebound in inflation from below 10% to double digits as a consequence of the bank’s move to ease monetary policy, the bank is likely to keep its current course to help revive Iran’s industrial sector that is stagnant. Moreover, although some recent economic indicators point to a reversal of inflation’s declining trend, headline inflation has been in decline and inflationary indicators remain well within the bank’s announced target range.