Last update: Sun, 07 Feb 2016 10am
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Changing trends in T-bill auction

The fourth and the last round of T-bill auctions of the current year has begun, with the government aiming to sell a total of Rs1150 billion worth of papers from all seven treasury auctions scheduled to be held in the current quarter.

Just like the previous treasury auctions, market participation in the first treasury auction of this quarter, held two days back, remained strong with bids 1.4 times the amount subscribed.

However, the government sold around Rs200 billion worth of treasury papers, in line with the pre-auction target. In addition, it raised Rs25 billion through non-competitive bids given that around Rs237 billon worth of treasury bills were scheduled to mature yesterday.

Unlike the auctions held in the previous quarters, what’s new this time is that 6-month papers remained the central figure. With fundamental factors pointing to a stable interest rate in the next few months, the benchmark paper attracted around half of the participation.

On the other hand, tenders for the 3-month papers amounted to Rs66 billion, just around 24 percent of the total amount, as against an average of 63 percent seen in the auctions held in the 3QFY11.

The 3-month papers had remained a fad throughout the year till the start of the third quarter. However, subsequent to the monetary policy held in January when the SBP kept the key rate unchanged at 14 percent, market participation started drifting away from the 3-month to the 6-month paper.


Therefore, taking into account the reinvestment risk and the cost, bids placed for 3-month papers were on the higher side. Given this scenario, the government just sold around Rs1.1 billion worth of 3-month bills. If the government had raised a quarter (Rs50 billion) of the accepted amount from 3-month paper, the cut off yield on 3month paper would have gone up by around 18 bps.

Capitalising on the high demand for the 6-month paper, the government fetched Rs140 billion of the funds from it. Despite raising around 70 percent of the total amount, the cut-off yield on the 6-month paper just inched up by 5 basis points, whereas the cut-off yield on 3-month and 12-month papers increased by 5 bps and 6 bps respectively.

The rising popularity for higher tenure papers, thanks to the reduction in inflationary pressure and the improvement in macroeconomics indicators, is a good omen for the government, as it will wind down the rollover risk, which increased massively in the past quarters.

This can be determined from the fact that out of Rs1150 billion worth of T-bill due to mature in the current quarter, papers worth around Rs583 billion belong to the 3-month tenure in the previous quarter.

However, growing oil prices in the international market pose serious threat as it will offset the positive impact arising from improvement in external account and would keep stoking inflationary fears.

Higher inflationary expectations are evident from the ADB’s latest report, which has forecast FY11 and FY12 inflation at 16 percent and 13 percent, respectively. If these fears materialise, the country’s money management story would go back to the square one down the road.