3-month bills: hot cakes or what

The very first treasury auction of the second quarter held this week was met with strong demand from investors, with 3-month bills selling like hot cakes.
Stemming from high liquidity in the market, amid low credit demand and growing risk averseness amongst lenders, the auction saw upbeat participation of Rs242 billion. This made it easy for the government, to raise nearly Rs84 billion against the pre-auction target of Rs80 billion. Out of the amount raised, the 3-month paper alone saw a participation of Rs57 billion.
That isn surprising given the high uncertainty in the market; the threat of more so-called quantitative tightening has left shorter tenure securities in high favour.
In the face of the 50 basis points hike in the discount rate, the cut-off yield on the 3-month bill increased by just 9 basis points compared to the auction held before the monetary policy. At the same time, the cut-off yield on 6-month and 12-month bill saw a jump of 29 basis points and 45 basis points respectively.
As the maturity of the 3-month bill issued in this auction also falls in the same quarter (December 30), the total treasury bill liabilities due to mature in second quarter has increased by Rs57 billion to around Rs704 billion.
Given the pre-auction target for the quarter is Rs685 billion, the gap between asset and liability suggests that the government might sell more bills than the targeted amount during the ongoing quarter.
On the other hand, growing investors proclivity for short tenure securities suggests that PIB auctions are still not out of the woods. On account of low participation and high bids, the government scrapped its last two PIB auctions held during the previous quarter.
While the government has planned to raise Rs40 billion from the next two PIB auctions scheduled in the second quarter, the hike in the discount rate, following which benchmark PIB yields rose by 40 basis points to 14.05 percent, the fate of the auction looks dicey.
With yields currently high on the benchmark PIB, and since the government has rejected all bids invited in the last two PIB auctions, it seems that the demand for the 10-year paper may prevent the bond prices from further fall in the current quarter.
According to a money market dealer, "no one knows the extent to which quantitative tightening will continue and for now expectations are already built into market rates".
Amid growing inflationary pressures, the second quarter seems tough for long tenure securities. However, the market direction would become relatively clear in the latter half of the year, when the exact impact of the floods would be better known.