Investors expect no rate cut

Breaking away from the usual trend, the Treasury bill auction held on Wednesday failed to garner adequate funds. With investors eyeing higher yields, there seems to be a strong disagreement between the borrower and the lenders. Although the participation stood around Rs.87 billion, drawing the total participation to target ratio of 1.2; the government accepted a negligible sum of Rs.4.8 billion worth of bids. Out of the total pre-auction target of Rs.75 billion, around Rs.37 billion worth of t-bills were due to mature a day after the auction. The government accepted a trivial amount of bids from 3-month and 6-month papers, thereby, keeping the cut-off yields unchanged at the same level as the last auction held earlier this month. The government rejected all bids placed in 12-month paper. Hence, the cut-off yield on 6-month paper stood at 11.80 percent in the auction. However, since the previous auction was held, the PKRV on the benchmark paper has been increased by around 11bps to 11.83 percent. Moreover, participation in the current auction was lower compared to the previous auction. This can be gauged from the fact that the average participation to target ratio has hovered around 2.7 in the past three auctions held in 3QFY12. The market attributed the feeble participation level to a lower liquidity level. "The market has been grappling with lower liquidity level since the past few months. But, given that the interest rate had been on a downward trend, the participation stayed high in the past few auctions as investors overleveraged their position to lock their funds at a higher interest rate," a money market dealer told BR Research. Moreover, the flow of participation also shifted to 3-month paper, attracting nearly half of the total participation in the auction. Since the investors will continue to play a hard bargain amid obscure interest rate outlook, the market expects that the weak appetite for treasury paper might tilt the governments borrowing pressure towards the central bank.