After witnessing poor market appetite for long-tenured government bonds in 1HFY11, a stabilising interest rate environment, following the central banks recent wait-and-see monetary strategy, has made PIBs a beloved-asset again.
In the first PIB auction of the third quarter (held last week), investors tendered bids worth Rs53 billion (face value), bringing the participation-to-pre-auction target ratio to 2.6. The ratio had been quite poor in the first half - averaging around 1 in the four PIB auctions held in 1HFY11 - as there had been a continuous rise in the discount rate in all the three monetary policies held between July and November.
Money market dealers say that the auction saw a huge demand from the corporate sector, such as pension funds and insurance companies, on the back of a slight improvement in market confidence.
Despite the overwhelming market response, however, the government sold papers close to the target amount, as they accepted bids close to Rs26 billion, and rejected the bids for 7-year, 15-year, 20-year and 30-year papers.
With the discount rate unchanged at 14 percent in the last monetary policy, the cut-off yield on 3-year and 5-year bonds remained static at 14.24 percent and 14.29 percent, respectively. The 10-year paper saw a drop in the cut-off yield by 9 bps on the back of strong buying pressure from the corporate sector. More than half of the market participation remained concentrated in the 10-year bond, which is considered the most liquid PIB bond.
Given the total pre-auction target for the quarter is Rs35 billion, the improving participation suggests that the government might sell more bills than the targeted amount during the ongoing quarter.
However, in the midst of an uncertain economic environment, the fate of the PIB auctions hinges on improvement in the overall fiscal condition and inflation expectations as any further growth in inflationary pressures could easily tilt the market away from long-term bonds.
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