T-bill investing in vogue

With the interest rate showing signs of heading north, investors fervently rushed for the 3-month papers in the Treasury Bills auction held on Wednesday.
The first treasury auction of this quarter, that had a pre-auction target of Rs175 billion, saw hefty bids, totalling around Rs199 billion. Participation was high on account of soaring liquidity in the market amid low credit offtake and limited investment avenues for lenders.
However, since the price of long tenure bills is relatively more sensitive to interest rate movements, nearly 86 percent of the auction participation remained concentrated in the 3-month bill.
The government sold a total of Rs160 billion (face value) bills, with nearly Rs150 billion alone from the 3-month bill, whereas it did not accept any bid for the 12-month bill in light of lower participation in the 12-month papers.
A lower acceptance rate compared to the target amount is in sharp contrast to the central banks stance, as the SBP wants the government to accept bids close to the target amount if participation remains high.
With higher inflation on tap, the upward movement in the cutoff yield was imminent, which has surged by 18 bps and 9 bps for 3-month and 6-month government papers, respectively, over the previous auction.
The lowest yield placed on the 3-month bill and 6-month bill increased by around 14 bps compared to the lowest bid placed on the last auction held in the previous quarter, whereas the lowest bid for the 12-month paper jumped by around 15.5 bps.
Given the current economic scenario, it seems probable that the SBP will increase discount rate in the upcoming monetary policy, due on January 29, on account of rising food prices and growing government borrowing from the central bank.
In a scenario, where it is difficult to drum up interest for bonds, the government has set a lower auction target for PIB in the 3QFY11; the government is aiming to raise a total of Rs35 billion, compared to Rs 85 billion per-auction target for 1HFY11.
For Islamic bonds, on the other hand, the government has plans to raise Rs45 billion through Ijara Sukuk auction in 3QFY11, where participation is expected to remain upbeat since there is a dearth of investment avenues for Islamic banks.
As for the treasury bills, the government is aiming to raise a total of Rs980 billion from the six auctions planned for the current quarter, where, with the 3-month bill in vogue amid high liquidity, the auctions are likely to meet strong demand from investors.