PIBs back in the game

Buoyed by signs of interest rate stability, the market has been witnessing improvement in the appetite for long tenor government papers of late.
With fears of price risk assuaging in the bond market, the sixth PIB auction of the current fiscal year, held two days back, saw participation more than thrice the size of the pre-auction target amount of around Rs15 billion.
This is starkly high as against the average participation to target ratio of around 1.02 for the first four auctions held in the first half of the current fiscal year.
The auction drew most of the participation in 3 year, 5-year and 10-year bonds, attracting nearly 22 percent, 11 percent and 61 percent, respectively, of the total participation of around Rs49.7 billion.
Given this scenario, the government rejected 7-year, 15-year, 20-year and 30-year bonds, and accepted a total of Rs22.4 billion from the other three tenor bond.
While on the heels of correction in market sentiments, the lowest bid placed on all maturities declined as compared to the lowest bids placed in the previous auction held last month, according to market sources.
However, on the back of strong buying pressure, the government raised nearly 78 percent of the total amount from 10 year bond alone, while cut-off yield declined by 15bps to 14.11 percent.
The demand for 10-year bonds is always in vogue as it is considered a benchmark security and therefore, it is highly liquid. The 3-year and 5-year paper also saw a drop in cut off yield by 17 bps and 18 bps to 14.07 percent and 14.11 percent, respectively.
The government had set a target to raise a total of Rs35 billion form two PIB auction in 3QFY11.However, better participation level and lower bids helped the government to sell Rs48.5 billion worth of papers.
On the contrary, the growing interest rate environment toppled the PIB auctions held in 1HFY11 as the government sold a total of around Rs27 billion worth of papers as against target of Rs85 billion.
With the market expecting interest rate to remain stable in the next few months, the appetite for PIBs is likely to remain smooth in 4QFY11. Given this scenario, it is quite likely that the government might set PIB pre-auction target above Rs40 billion for the last quarter.