PIB auction priced out of the market

Financial institutions really tried to drive a hard bargain in the last PIB auction held two days back, by demanding higher yields for all maturity bonds.
On the back of strong market sentiment that either the discount rate will be maintained at the current level or increased in the upcoming monetary policy review, even the lowest bids placed on the auction-- for three to ten years maturity bonds-- were nearly 30 to 40 basis points higher than the last PIB auctions cut off yield.
Participation also remained tepid, as the auction garnered bids worth nearly Rs19 billion against the target of Rs20 billion.
Presumably, participants may have been planning to take positions in the next PIB auction-scheduled for next month as they are anticipating a hike in the discount rate in the upcoming review.
But, it takes two to make a bargain; the auction didn go as planned as the government has rejected all bids invited for all maturity bonds.
It seems that the government doesn want to raise funds at higher rates, while it also signals that the government doesn want the yield curve to shift upward, at least not until the next T-bill auction.
As the government is aiming to raise Rs85 billion from the next T-bill auction, its importance is higher than the previous sale, said one money market dealer. T-bill auctions are schedule to be held twice a month till September to raise a total of Rs535 billion during first quarter FY11.
On the other hand, the government is longing to raise a total of just around Rs85 billion from four PIB auctions during the 1HFY10.
Few in the market believe that the government has missed out on a chance to get cheaper finance, citing that the discount rate will either remain at its current level or go up. An upward trend in interest is likely to prevail amid inflation expectations. Paradoxically, others speculate that the government is expecting the rate to remain constant in the upcoming policy. Had it anticipated a discount rate hike, it would have enthusiastically participated in the previous auction.
But, since monetary policy falls within SBPs domain and fund raising under governments territory, future interest rate movements may possibly vary from current perceptions and expectations.