Success of PML-N: What the debt market has to say?

Among the promises made by PML-N in its manifesto to revive the economy, keeping the interest rates and inflation in check are the ones that seem to have most appealed to treasury market participants. The turnaround in market behaviour in the recent T-bills auctions speaks volumes for what they expect out of the newly elected government.
Heightened investor confidence in the newly-elected government is well evidenced by the overwhelming response of investors in the T-bills auctions conducted right after the election. Even a glimpse of it puts a lot in the picture.
The investors shied away from investing in T-bills in the last two auctions conducted before elections largely on the heels of political transition circling the country (see participation ratio in the table). However, this time around, investors swarmed the T-bills auctions, bringing about the participation of over 200 percent. The recent auctions also witnessed a sharp fall in the cut-off yields which inched up in the last auctions.
Another interesting finding is that over 68 percent of the bids were received for the 12-month papers, followed by 31 percent participation in six-month paper and less than one percent in three-month papers.
Does this investor bias towards the longer term T-bills coupled with a drop in the cut-off yield signal another rate cut?
BR Research spoke to market participants and found out that they don’t expect any monetary tightening specially in the first hundred days of PML-N’s regime. Moreover, the comfortable position of the CPI inflation witnessed last month further faded the probability of a rate hike in the upcoming monetary policy.
Here the looming IMF programme begs the question. The vulnerable fiscal position makes the IMF funding inevitable for the country and not to forget that monetary tightening is one of the prerequisites. Provided the country enters any such programme, discount rate is sure to climb. However, the market anticipates the IMF programme to show its colors in the latter half of the year.
PML-N had been very vocal in its manifesto about directing banks towards SME and private sector. While it would be too early to guess the exact approach the new government will take to boost the private sector credit, market participants envisage that the golden opportunity of excessively parking funds in risk-free government papers might vanish sooner than later.
Hence, the buoyant participation in recent auctions is symptomatic of the market making the most of the opportunity before it dies out.

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T-BILLS AUCTION PROFILE

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Auction Date        Auction    Participation            Cut-off

                     Target         Ratio                 Yield

                    Rs(mn)                   3-month    6-month   12-month

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17-Apr-13          175,000          0.34      9.411%     9.428%    No bids

30-Apr-13          250,000          0.66      9.457%     9.450%     9.457%

15-May-13          200,000          1.61      9.411%     9.428%     9.447%

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Source: State Bank of Pakistan.

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