T-bill auction: seal a bargain

March 09, 2012

BR RESEARCH

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After a hard bargaining session- played between lenders and the borrower - in the previous treasury auction, which was held last month, a successful treasury-bill auction, held two days back, suggests that the both parties have reached halfway. In the previous treasury-bill auction, the government had rejected all bids placed in 12-month paper and accepted a trivial amount of bids from 3-month and 6-month papers, thus, maintaining the cut-off yields unchanged. However, this time around, the participation stood at around Rs.157 billion, as against the pre-auction target of Rs.100 billion. In light of a higher participation level, the cash-starved government accepted Rs.122 billion. Although the market has been grappling with feeble liquidity level since the past few months, participation level stayed normal on an account of injection of liquidity in the market through OMO, together with significant amount (Rs.81 billion) of papers due to mature a day after the auction. While a jump in the cut-off yields substantiates the market perception that interest rates have bottomed out, not expecting interest rate to cut further in the near term. The cut-off yield on the benchmark paper increased to 11.9 percent in the current auction, marking a jump of around 9bps relative to the previous auction. The average inflation is hovering around 10.8 percent during the first eight months of FY12, as opposed to the average of 14.07 percent during same period of last year. However, investors see inflationary pressure down the line, stemming from higher energy cost and possible threat that oil price might increase in the future and drying foreign inflows. This is clear from participation pattern, as 3-month and 6-month paper attracted nearly 88 percent of the total participation crowd. And the market believes that investors will continue to accumulate shorter tenure papers as long as there is indecision about the future direction of the discount rate. Since the government is shying away from borrowing through inflationary avenues, without a shadow of doubt, borrowing through treasury-bill auctions will continue to remain a key borrowing window for the government. This underscores that the government has lower bargaining power to influence yield structure of treasury instruments.