T-bill auction - a hard sell

In this era of efficient markets, its safe to assume that most of the times, significance of a law of supply-demand in determining cost of money exceeds that of fundamental factors.
The upward jump in cut-off yields in the previous treasury auction, amid subdued inflationary environment, demonstrates the strong influence of a market borrowing and lending equilibrium level on market interest rates.
Since demand at the auction fall short of the governments pre-auction target, the cut-off yield on 3-month, 6-month and 12-month papers jumped by 32 bps, 16 bps and 7 bps, respectively.
The auction drew a participation to target ratio of around 0.8 against an average ratio of 1.6 for all auctions held since the start of the second half of the fiscal year. The great bulk of buying remains concentrated in the 6-month and 12-month papers, accounting for around 55 percent and 33 percent of the total bids placed, respectively.
Given this scenario, the cash-starved government accepted Rs135 billion or nearly 97 percent of the bids placed in the auction.
The market attributes this puny participation to seasonal factors as commercial banks set aside huge amount of funds to satisfy tax outflow requirements at the end of each fiscal year.
Secondly, fewer t-bill maturities - less than the pre-auction target amount were due to mature a day after the auction - also dampened demand for new treasury papers. The amount of funds slated to mature was close to Rs145 billion as opposed to the pre-auction target of Rs175 billion.
The two T-bill auctions, along with a PIB and a Sukuk auction, held last month also absorbed a sizeable portion of cash from the market.
Confident investors had projected the poor participation accurately before the auction, since the lowest bid placed in the 3-month and 6-month paper was nearly 14 bps higher than the lowest bids placed in the previous auction.
The other factor that had increased investors bargaining power was the high rate of return in the previous OMO, where SBP injected around Rs26 billion at 13.31 percent.
Above all, commercial bankers were seen loath to lend on account of an announcement of fiscal budget at the end of the same week. However, T-bill and PIB auction calendars suggest that commercial bankers would get an opportunity to purchase sovereign instruments in the last month of the current fiscal year when the situation will become clearer.