T-bills back to square one

When it comes to gathering information about market behaviour, nothing can be more accessible and resourceful than T-bill auction results, which not only mirror market sentiments and expectations, but also provide insights into the market liquidity position and appetite for fixed income securities.
The fourth treasury-bill auction in the last quarter of the current fiscal year, held two days back, attracted a total of Rs 191 billion worth of bids, drawing a bid-to-cover ratio (a measure of market appetite relative to the papers available for sale) of around 1.2 - the lowest level since 26 January 2011.
With market demand intact for fixed-income securities, the lower bid-to-cover ratio in the current auction is a reflection of the lower liquidity level in the market.
This doesn come as a surprise since the government has raised a huge sum of around Rs 688 billion alone in the previous three Treasury bill auctions and sold around Rs46 billion worth of bonds in the Ijara Sukuk auction held last week.
Moreover, market liquidity took a knock as the total amount of bills due to mature a day after the auction, on 19th May, was slightly lower than the pre-auction target of around Rs 150 billion.
However, in line with its borrowing target, the government managed to sell a total of Rs 159 billion worth of papers, with the benchmark paper representing nearly 50 percent of the total bills sold.
The governments borrowing costs rose at the auction, with the weighted-average yield on the 6-month paper leaping to 13.54 percent from 13.45 percent at the previous auction. The cut-off yield on all three tenures jumped, but the shortest tenure - which experienced the biggest drop in the last auction - saw the biggest hike.
As investors are expecting the interest rate to remain stable in the next monetary policy amid relatively stable macroeconomic indicators, the jump in cut-off yields mainly reflects market adjustment since yields drastically fell in the previous T-bill auction on account of an extraordinarily high participation level.
However, even though the market has lifted the yield this time, it has adjusted it below the level seen in the auction held on 20 April 2011, which strongly hints at stable interest rate scenarios for the next two to three months.