T-bill demand weak and spotty

With lenders on a shoestring, as the fiscal year draws to a close, the participation in the latest Treasury bill auction, held two days back, remained tight-fisted. A profound lack of liquidity in the market is not a new phenomenon, but scheduled tax payments at the end of the fiscal year, along with growing liquidity requirement ahead of Ramazan, has capped the banks ability to extend loans to the government. The cash-strapped government was counting on a pre-auction target of Rs.120 billion, but the total participation stood at a miserable Rs.65 billion, drawing a participation to target ratio of around 0.55 as opposed to an average ratio of around 1.25 during the past five auctions held since the start of 4QFY12. Given that the market stayed indecisive over the future direction of interest rates, the shortest tenure paper attracted nearly half of the total bids placed in the auction. For the fifth time in a row, the monetary policy committee has kept the discount rate unchanged at 12 percent in the last monetary policy held at the start of the current month. Economic upheaval in Europe, along with slowdown in China, has whittled commodity prices down in the past few months. But with the government in the throes of excessive borrowing from the central bank, the market reckons that higher borrowing from inflationary sources might nullify the positive impact arising from decline in lower commodity prices on the target interest rates. The insatiable appetite for funds lifted the governments borrowing from SBP by Rs.414 billion since the start of the current fiscal year (till May 25, 2012), out of which Rs.310 billion were raised since the start of the last quarter. Another discordant development was strengthening of dollar against rupee, which appreciated by around 5 percent since the start of CY12. The cash-starved government accepted a total of Rs.61 billion worth of bids, nearly Rs.59 billion shy of pre-auction target level when Rs.125 billion worth bills were due to mature a day after the auction. The cut-off yield on 3-month paper inched up by 5 bps to 11.92 percent. While the cut off yield on 6-month and 12-month paper stayed unchanged at the previous auctions level of around 11.94 percent and 11.95 percent, respectively. Out of a total six auctions held since the start of the current quarter, the government managed to raise a total of Rs.760 billion as opposed to the pre-auction target of Rs.910 billion. The funding from floating rate instruments now accounts for just over half; 54 percent of the total domestic currency debt. Scheduled banks are holding roughly 75 percent of total outstanding Treasury bill on their books, amounting to Rs.2 trillion as on April 30, 2012.