Bills chugging along

The sale of sovereign instruments ran like clockwork during FY11, thanks to surplus liquidity in the system amid limited investment avenues.
The treasury bills remained in great demand throughout the last fiscal year (FY11), with average participation level at each auction nearly twice the pre-auction target amount.
In keeping with the interest rate trend, there was an apparent shift in market preference from the 3-month paper to 6-month paper during the year.
On the back of a continued hike in interest rates during the first half of FY11, there was a rush for the 3-month paper during the first three quarters of the current fiscal year. However, the stability in the interest rates later shifted the selling pressure towards the 6-month paper in the last quarter.
Similarly, the decline in rollover time, on account of a high participation level in the shortest tenure paper, increased the governments quarterly borrowing requirement throughout the year.
The pre-auction target level reached Rs1150 billion in 4QFY11, which is nearly 2 times, 1.7 times and 1.2 times higher than the pre-auction target level in 1QFY11, 2QFY11 and 3QFY11, respectively.
Monetary tightening had an adverse bearing on the yields during the first half of the fiscal year. The cut-off yield on the bench mark paper sharply increased to 13.46 percent in the auction held in December 29 from around 12.34 percent in the 14th July auction.
The cut-off yield on the benchmark paper reached 13.73 percent in the auction held on 29 June11, marking a relatively modest jump during the second half of the year.
As against the total annual pre-auction target of Rs 3,350 billion in FY11, the government sold nearly Rs3,543 billion of bills, alleviating policymakers fears that the government accepts only lower bids.
Net government borrowing remained close to Rs 258 billion given that Rs3285 billion of maturities were due during the year, according the SBP.
The shift towards long tenured papers during the last quarter will reduce the governments borrowing requirement in the first quarter of the current fiscal year, as nearly Rs655 billion worth of bills are due to mature in the 1QFY11.
But, a higher government borrowing requirement suggests that the pre-auction target during the next year is likely to remain close to Rs750 billion.