T-bill: easy sell or easy buy

Nothing could be easier than selling treasury bills in a country that lacks investment avenues and where risk free securities yield a double-digit rate of return.
For a cash-starved government, the above mentioned scenario definitely provides a good borrowing alternative. But, in such cases, investors, who are cognizant of the fact that the government is in dire straits usually play a hard bargain to demand lucrative returns.
The treasury bill auction held two days went swimmingly well, as the submitted bids totaled Rs233 billion, or nearly 1.5 times of the pre-auction target amount of Rs150 billion.
In keeping with a high participation level, the government exceeded its borrowing requirement by accepting a total of Rs180 billion worth of bids, which is also higher than the total of Rs124 billion worth of bills that matured yesterday.
The market relates aggressive selling to the governments high level of a borrowing requirement at the end of each fiscal year. Similarly, this might also reflect the governments progress to pare down its borrowing from the central bank.
Since investors are expecting the interest rate to remain stable in the near future, the benchmark paper stole the spotlight by attracting nearly half of the participation level.
The bidding pattern clearly suggests that the savvy investors tried hard to keep the yield constant at currently high levels. The lowest bids placed on the 3-month, 6-month, and 12-month paper were nearly 18 basis points (bps), 2 bps and 5 bps, respectively, higher than the lowest bids placed in the previous t-bill auction held earlier this month.
Therefore, the cut-off yield on the 12-month paper remained unchanged at around 13.9 percent, while it modestly fell by 5 bps and 2 bps on 3-month paper and 6-month paper, respectively. However, the new cut-off yields are still above the May-17 level.
The market had earlier forecast a greater drop in the cut-off yields, which had steeply increased on account of a lower participation level in the auction held at the start of June 2011.
In line with the participation pattern, the benchmark paper accounted for nearly half of the accepted amount, and money market dealers believe that investors will continue to accumulate 6-month paper as long as there is indecision about the future direction of interest rate.
The investors will see one more t-bill auction before the end of the current fiscal year, at which the market expects the governments borrowing requirement to again outstrip the pre-auction target level of around Rs50 billion.