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Longing for long term bills

The Treasury Bill auctions in the third quarter of the current fiscal year concluded with some positive trends, suggesting the strengthening of macroeconomic indictors.

With fundamental factors pointing to a stable interest rate in the upcoming monetary policy, there has been an apparent shift in the market participation pattern during the treasury bill auctions held in 3QFY11.

Aided by a decline in price risk, the 6-month and 12-month papers have surprised the market by drawing investors away from the 3-month counter during the quarter ending March.

Hence, participation in the 3-month paper tailed off to 21 percent (of the total participation level) in the last auction from around 87 percent in the first auction of the quarter. At the same time, participation in the 6-month paper surged to 43 percent from around 8 percent at the start of the quarter.

In addition to reduction in inflationary pressures, the better tone of the market is being attributed to phasing out of government borrowing from the central bank and the recent adoption of a few appropriate corrective fiscal measures to curtail expenditures and jack up revenue generation.

Similarly, the stable interest rate outlook has also talked down the cut-off yields. The cut-off on 3-month paper that had surged to this year’s high of around 13.66 percent in the treasury auction held on January 26th (ahead of last monetary policy), fell to around 13.25 percent in the last treasury bill auction.

The decline is also attributed to a steep fall in the government appetite for 3-month paper as the ratio of the total amount of funds raised from 3-month paper fell to 2 percent in the last auction, as against 93 percent in the first auction held in 3QFY11.

The improvement in investors' temptation for longer tenor bills, along with the improvement in their acceptance ratio protected cut-off yield on 6-month and 12 month papers form a greater fall.

The cut-off yield on the 6-month and 12-month papers declined by 7 bps to 8 bps to 13.64 percent and 13.80 percent, respectively, from the highest cut-off rate touched in the auction held in late January.

In keeping with the government’s growing borrowing dependence from treasury sales, together with maturity of a sizeable portion of the government papers around Rs1149 billion falling in the fourth quarter, the government will likely to be forced to lift up the next quarter’s auction target.


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