T-Bills auction: high and dry

The last Treasury Bills auction went swimmingly well. The government sold more treasury papers than it had initially planned, signaling a growing appetite for borrowing. The government accepted bids worth around Rs124 billion against the target of Rs85 billion set for auction.
Presumably, government borrowing hit a higher-than-targeted level to retire Rs49 billion worth of bills due to mature at the start of next month. Some relate the rise in borrowing to the unsuccessful PIB auction held last week, in which the treasury didn raise a penny, against a target of Rs20 billion.
Owing to strong market sentiments that interest rate might increase in the upcoming monetary policies even the lowest bids placed on the PIB auction - for three to ten years maturity bonds - were nearly 30 to 40 basis points higher than the previous PIB auctions cut off yield.
Hence, to cap the cost of financing and stabilize yield curve for the July 28 T-bill auction, the government took hard line by rejecting all bids placed in the last PIB sale.
However, it seems that the governments hard stance in PIB auction has really reaped benefits in the T-bill auction, since weighted average yield for all maturities remained relatively same. The cut-off yields for 3 month and 12 month maturity paper were maintained, while it increased by 3 basis points for the 6-month maturity bill.
As the market awaits monetary policy today, which will give a clearer view, participants had forecast lower demand for government paper in the treasury auction. Bidders participation in this weeks T-bill sale, however, was also upbeat in contrast to market expectations.
With the market expecting hike in interest rate during the current fiscal year, short-term government papers have been gaining attraction as they have lower interest rate risk than long-term bonds.
Investors waning interest in long-term bonds is evident from weak participation at PIB auction held last week, whereas high demand for short-term securities also indicates massive cash due to slow credit growth amid limited investment avenues.
For next treasury auction, bidding pattern largely hinges on the outcome of todays monetary policy. However, even if the discount rate is maintained today, market expects inflationary pressures to continue to loom over the yield curve.