Money, Debt Markets Converge on Returns

It took a while, but the Central Bank of Iran’s crackdown on regulating interest rates finally paid off and now the changes seem to have trickled down to the debt market.

This could potentially be the beginning of the end for high interest rates’ paralyzing effect on riskier markets such as equities.

On behalf of the government, the Economy Ministry issued nine million Islamic Treasury Bills in Iran’s Fara Bourse on Saturday under the “TB121” ticker. The one-year ITBs were valued at 9 trillion rials ($219.51 million) and offered a yield to maturity of 14.1%, according to the Persian daily Donya-e-Eqtesad.

YTM is on the same level as the deposit interest rates CBI obligated banks to pay back in September. Based on its directive, banks and credit institutions were obligated to adhere to long- and short-term deposit rates set at 15% and 10% respectively.

Both rates are currently a far cry from their 20-30% highs of the last few years. The high-return, low-risk debt and money market were on many instances blamed as the main cause of economic slowdown.

The current harmony between YTMs and interest rates seems to present an opportunity for expanding the debt market on the back of potentially higher demand for bonds, now that the two markets’ investment attractiveness has reached a common ground.

In the long run, it could also lure previously risk-averse investors into trading equities and boost the economy’s production sector through the injection of fresh finance.

Yet, despite all the recent developments, there is still a long way for the Iranian debt market to reach global standards.

Latest statistics indicate the Iranian debt market makes up 4.7% of the country’s 6.69 quadrillion ($163.19 billion) GDP and 6.8% of the capital market’s total 4.67 quadrillion rials ($114 billion).

This is while Donya-e-Eqtesad’s survey of 15 developed countries shows that the debt market’s size is 113% and 185% larger than the countries’ GDP and capital market value respectively on average.

The Iranian debt market has already come a long way though. Things started with the treasury selling its first batch of ITBs to domestic investors in September 2015. The bonds were given as debt repayment to contractors who had the option to resell them in the over-the-counter IFB market or wait and redeem them at maturity. Eleven medium-term and two short-term ITBs were issued in the 2015-16 fiscal year.

The funds raised by the debt issue, according to the Chairman of Management and Planning Organization Mohammad Baqer Nobakht, will be spent to finish the array of incomplete development projects across the country.

Since the first ITB issuance up to September 2017, the effective return on these bills was between 21-32%.

Rates started to spike in early 2017, however, and led to capital traders and officials complaining about capital flight from equities to bonds.

In a controversial move, the Securities and Exchange Organization refused to accept more ITBs in the capital market in March and the government decided to sell its new batch of ITBs called “Sakhab” through banks.

Yet the opaque nature of these sales again led to an uproar in the markets and things came full circle, with the SEO designating IFB as the sole trader for ITBs.