T-bill yields down but not for long

In an economy where commercial banks have been blessed with immense liquidity, it is highly unlikely that government treasury auctions will go unnoticed by investors.
The market participation in the third treasury-bill auction in the third quarter of the current fiscal year remained twice the size of the pre-auction target. However, despite the overwhelming market response, the government sold papers close to the targeted amount, as they accepted bids close to Rs158 billion.
The auction saw around 65 percent of the total participation in the 3-month bills, which is lower compared to the average 85 percent participation witnessed in the 3-month paper in the first two auctions held in the third quarter. This reflects a slight improvement in market confidence following the SBPs decision in the last monetary policy, which has the kept the discount rate unchanged at 14 percent.
In sharp contrast to the recent cut-off yield trend, which has been constantly moving up, this auction saw a drop in cut-off yield by 13 bps, 2 bps and 2 bps on 3-month, 6-month and 12 month bills, respectively.
The aberration in cut-off yields reflects a market correction as investors had been expecting the discount rate to rise by 50 bps in the last monetary policy and had placed higher bids in the second (previous) treasury-bill auction.
According to a money market dealer, "Although cut-off yields have declined in the last t-bill auction, bids are likely to go up again in the next t-bill auction on the back of perennial inflationary pressure along with the governments growing interest in treasury bills." He added that the government has been tilting its borrowing portfolio from central banks to scheduled commercial banks.
The government borrowing size from the central bank has reduced to Rs 114.5 billion as of 29th January, from its peak level of Rs328.6 billion touched on 11th December last. At the same time, government borrowing from the scheduled banks jumped to Rs 245 billion from Rs 88 billion.
Since borrowing from the private sector (working capital requirements) usually remains tepid during the second half of the fiscal year, more funds are likely to make their way into government accounts.