PIBs and banks: No love lost

Even a 30 bps cut in yields from the previous PIB auction was not enough to keep investors interested. The latest PIB auction helped the government to fetch another Rs150 billion in the longer tenure papers, exceeding Rs50 billion target by over three times. The previous auction too, had attracted similar interest, where accepted bids tripled the target of Rs50 billion.
Banks continue to have preference for PIBs over treasury bills, despite a cut in interest rates. It was widely anticipated that the interest in PIBs may recede after the rate cut, and banks may look to build their advances portfolio. But the last two auctions have proved otherwise, as banks continue to fill the governments never ending appetite.
Government accepted it with both hands as the rates were down from the previous auction. It had the luxury to reject bids worth almost Rs200 billion on higher rates. Market participants shared that some of the bigger banks which had left behind in terms of having more PIBs in the kitty have come in and boosted the IDRs further.
The longer term duration naturally works well with banks as risk-free returns compliment well with the capital gains on offer. But the real catch is in the trading market, where according to investors, yields have come down by 60 bps from the auction rate. This depicts the markets overall mood, which anticipated interest rates to go down steeper and rather sooner, as inflation outlook remains lower. Most participants BR Research spoke to, anticipate at least another 100 bps to be shed in the upcoming monetary policy.
The government, on the other hand, is merrily picking the cherries in the name of improving the debt profile and building a long-term yield curve. All good, but do not forget all of it has to be repaid too, and should the rates go down, it could be mayhem. The disconnect between bond yields and interest rates has grown wider in the recent past, and that does not serve well.
Banks too, can make hay while the sun shines, but as one treasury manager aptly pointed out, "Such heavy PIB holding is an alarming sign as another asset pricing bubble is being created and it could burst, should things go wrong."