The cut-off yields on treasury bills (T-bills) fell in the range of 15-68 basis points in the auction of sovereign debt securities on Wednesday, encouraging the government to raise a higher amount of debt against the target to pay off previous loans.

“Cut-off yields have declined after the central bank left the benchmark interest rate unchanged at 9.75% and strongly signaled that the rate would stay at current level in the near future against expectations of a further hike in the range of 25-100 basis points during the second half (January-June) of ongoing fiscal year 2021-22,” Pak-Kuwait Investment Company Head of Research Samiullah Tariq said while talking to The Express Tribune.

The government raised debt of Rs729 billion by selling three, six and 12-month T-bills to commercial banks in the auction against the target of Rs650 billion.

It was scheduled to retire previous loans of Rs794 billion on the same day, brokerage houses reported while quoting central bank’s data.

The status quo in the policy rate and the outlook of no change in the monetary policy statement released by the central bank on Monday gave a clear direction to the primary bonds (T-bills) market.

In addition to this, the returns on three to 12-month T-Bills and three to 10-year Pakistan Investment Bonds (PIBs) declined in secondary markets and the banks’ benchmark lending rate – Kibor (Karachi Inter-bank Offered Rate) also moved downwards.

Tariq recalled that the gap between the State Bank of Pakistan’s (SBP) policy rate and cut-off yields on government papers (T-bills and PIBs) and Kibor had widened by 100-150 basis points, hence the central bank would consider increasing the policy rate by 25-100 basis points in the second half of FY22. The usual gap between the two is around 50 basis points.

The return on three-month T-bills dropped 15 basis points (bps) to 10.3% in the latest auction compared to 10.45% in the previous auction held on January 12.

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The yield declined 68bps on six-month T-bills to 10.69% compared to 11.37% earlier. The cut-off yield on 12-month papers decreased 57bps to 10.93% compared to 11.49% in the previous auction.

Having ample liquidity in hand, banks had offered a huge amount of Rs2.26 trillion to buy the sovereign papers against the government’s target of Rs650 billion.

Tariq noted that the yields on six to 12-month T-bills dropped by a big margin (57-68bps) compared to 15bps for three-month papers. “The rate fell significantly on longer-tenure papers as banks were expecting a hike in policy rate from March onwards,” he said.

The rate on three-month paper dropped slightly as the gap between central bank’s policy rate and three-month T-bills was not as wide as six to 12-month papers. Banks had already adjusted the rate on the short-term paper in line with the policy rate, as the central bank had hinted in its previous monetary policy statement issued in December 2021 that it would maintain the rate in January 2022.

In the secondary market, the yields on three-year PIB dropped 63bps in the past two days to 10.82% on Wednesday. The yields on five-year paper fell 55bps to 10.98%, while the rate on 10-year bond decreased 39bps to 11.23%, according to the central bank.

Similarly, the three-month, six-month and 12-month KIBOR reduced 13bps, 38bps and 32bps, respectively, in the past two days or after the latest monetary policy was unveiled on Monday. The yields on T-bills had also slashed in the second market.

Published in The Express Tribune, January 27th, 2022.

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