T-bill auction: Expecting more rate cuts?

Even though the State Bank of Pakistan has cut the discount rate by 400 bps since May 2011, to reach 10 percent, it appears that the financial markets expect more loosening in the central bank’s monetary stance in coming weeks.
For this reason, financial institutions are continuing in their zeal to try and lock in higher rates in successive auctions of Government paper.
SBP revealed that its T-bill auction on October 17, received bids worth a whopping Rs449.5 billion. Banks and other financial institutions have been crowding the SBP window to buy T-bills over the past four auctions, ratcheting up bids worth Rs526.3 billion, Rs427.5 billion, and Rs471.1 billion, in the three auctions preceding the latest.
On the other hand, the central bank has accepted fewer bids in each of the last four rounds of T-bill auctions. Back on September 5, the total amount of bids accepted tallied Rs276.6 billion while the latest auction saw a cumulative amount of Rs170 billion accepted by SBP.
Hence, the actions of the SBP also appear to hint towards further room for lowering the discount rate, as it may be attempting to secure lower rates for the government’s short-term domestic debt.
The breakup of the bids received also alludes to the same expectations, with participants chasing after longer tenure paper instead of the three-month T-bill. In the latest auction, bids worth only Rs37.6 billion were received for three-month paper, while the six-month and 12-month T-bills received bids worth Rs259 billion and Rs153 billion, respectively.
A similar skew can be seen in each of the three auctions preceding that conducted on October 17.
Of the bids received, SBP accepted bids worth Rs170 billion; an amount lower than the pre-auction target of roughly Rs200 billion. This behaviour is once again consistent with the actions of the central bank in the past three T-bill auctions, each of which has seen the acceptance of an amount of bids lower than that envisaged in pre-auction targets.
The cut-off yield on three-month paper dropped by nine basis points to 9.6383 percent, while the same on six-month and 12-month papers fell by 11 bps and two bps to reach 9.6481 percent and 9.7118 percent respectively.
In a survey conducted by BR Research, prior to the latest MPS announcement by SBP on October 8; an overwhelming majority of respondents had opined that the discount rate would be lowered by a greater measure than that eventually announced by SBP.
Should the monthly inflation numbers reported by the Government remain in single digit, the rate-cut trend being anticipated by the market may come to pass as a reality in the next MPS announcement.