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The lost charm of treasury bills

Single-digit rates are not exciting enough anymore. Even with the rate cut view for the longer run maintained by the market, there were no takers for 12-month treasury bills in the latest MTB auction held on May 28, 2014. A look at the latest auction result makes the previous auction look like one from another world and another time.

The previous auction had managed to raise Rs348 billion, whereas the latest one snail paced to Rs78 billion. The bids in the 3-month and 6-month bills collectively are even lower than what were placed in 12-month alone in the previous auction. So what has changed in just two weeks? Market participants maintain that the view on economy is intact and the rates on offer make little sense for investors to be bidding for short-term papers.

One market participant highlighted the supply glut in the market, where bonds of similar tenure offer a healthier rate, in excess of 100 bps to T-bills–-effectively killing any rationale for active T-bill participation.

“There is no point carrying negative yields, when 1-3 year bonds offer in excess of 10 percent,” a treasury banker told BR Research, wishing not to be named.

Others believe that the post-Ramzan inflation numbers hold the key in determining where the interest rate cycle goes from here. Whatever the case, at least for the near-term almost everyone is anticipating a rate cut in the offing, which is why investors are shying away from papers of short tenures.

“The PIBs, with an effective maturity of 23 months are offering returns in excess of 12 percent, nearly 200 bps over and above the T-bills. Why would anyone with a sane mind opt for single-digit returns in such a scenario,” rightly pointed out another banker from the treasury.

The government’s borrowing appetite too is believed to have slowed down in the T-bills as it is looking to build a better debt maturity profile. Whether raising expensive debt makes economic sense or not is another debate, but the focus right now appears building a long-term yield curve.

“The T-bill participation trend is going to continue for some time, unless the PIBs go crashing down, which does not seem likely in the near future,” hinted a treasury manager from a foreign bank.


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