T-bill yields signal status quo

Study of market behaviour in Treasury-bill auctions provides a quick and easy formula to examine two vital indicators: interest rate direction and liquidity position. The fourth treasury-bill auction of the current quarter, held two days back, saw a stale participation level as buyers tendered a total of around Rs.201 billion, which was lower compared to the average participation of Rs.392 billion in the past three auctions held since the start of the quarter. Therefore, the auctions bid to cover ratio stood at 1.70 as against an average 2.13 for the past three auctions. This is down to satiable market appetite, arising from conversion of significant amount of circular debt into treasury securities earlier this month. A total of Rs.392 billion worth of treasury instruments were issued to erase circular debt, including Rs.218 billion worth of treasury bills. Besides, the Rs.360 billion 7-day OMO (injection) conducted by SBP on the last Friday is also symptomatic of liquidity shortage in the market. Another noteworthy development was the slight improvement in participation in the 3-month paper as it drew nearly 12 percent of the total crowd as opposed to a combined 3 percent in the previous three auctions. The money market dealers relate this sudden improvement in participation in the shortest tenure paper after a long pause to market expectations that the interest rate might stay unchanged in the next quarter. Or, in part, it could be due to demand arising from investors who want to tilt their portfolio towards shorter tenured securities to reduce the asset liability gap. Yet, lenders are carrying conflicting opinions on the interest rate outlook, divided over whether the discount rate will remain constant or would there be a further cut by 50 bps point in the next monetary policy. Inflation has inched up in October, but the participants in favour of monetary easing assert that the prevailing gap between interest rate and inflation creates room for a further cut. The year-on-year average inflation was 11.34 percent during the first four months of FY12. With the market carrying a conflicting opinion on the interest rate outlook, the cut-off yield remained unchanged at the last auction level on all three maturities. The 3-month, 6-month and 12-month paper were offered at 11.78 percent, 11.81 percent and 11.88 percent, respectively.