It appears that debt market participants are cheerfully celebrating the victory of PML-N. Just like the overwhelming market participation witnessed in the first post elections T-bill auctions, PIB auctions conducted on May 22, attracted an incredible investor response.
Recapping the pre-election PIB auctions since January, investor participation hovered between 1.1 times to 1.7 times. The participation remained highly skewed towards three-year bonds. However, due to exorbitantly high bids offered by the market in anticipation of the then possible rate hike, the acceptance ratio remained pitiable.
Conversely, this time round not only that the participation boosted to substantially high levels, a significant drop of 30 - 50 basis points in the cut-off yields triggered a notable rise in the bid acceptance ratio.
A money market dealer told BR Research that rising yields in open market operations (OMO) have lowered the spreads between T-bills and OMOs, persuading market participants to march towards higher maturity government bonds.
Industry insiders further opined that the decline in the cut-off yields in the recent auctions came on the heels of softer interest rate outlook. The record low inflation in May has in turn increased the real interest rates, pointing towards another round of monetary easing. Market participants also say that lower food prices will keep the inflation well below the FY13 target of nine percent, paving way for another rate cut.
Another reason for the drop in the cut-off yields is the expected boost in foreign flows which will provide enough liquidity to the interbank market hence keeping the secondary market yields in check.
Provided the country enters the IMF programme, the interest rate outlook will not remain the same. However, the government to-be as well as market participants are quite confident that the materialisation of Saudi oil facility and the release of Coalition support Fund before the close of the current financial year will at least delay the IMF programme, if not render it unnecessary.
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PIB Auction Profile (22-May-2013)
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Bond Tenure Auction Participation Acceptance Cut-off
Target Ratio Ratio Yield
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3-year 6,000 8.40 278% 10.0484%
5-year 6,000 3.38 188% 10.4373%
10-year 10,000 2.10 100% 11.0997%
20-year 3,000 No bids received - -
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Source: State Bank of Pakistan
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