Market on a shoestring

In treasury auctions, where investors behaviour is driven by market liquidity position and future macroeconomic directions, there is a normal ebb and flow. Aided by a hefty participation level, the first five treasury-bill auctions held in 4QCY11 (during October and November) went remarkably well. But, disarray over the future interest rate direction following the announcement of the last monetary policy (held on 30th November), along with reduced liquidity in the market, and resulted in dismally low participation level in the two treasury-bill auctions conducted in December. That is clear from SBPs latest statistics, which suggest that the average participation stayed close to Rs.34 billion in the past two treasury auctions, as opposed to average participation level of Rs.332 billion in the first five T-bill auctions held in 4QCY11. Hence, the government rejected all bids placed in the second last t-bill auction; whereas, it accepted a total of Rs.252 million worth of bids in the last auction from 3-month and 12-month paper. The aberration in participation level is symptomatic of lower liquidity level. The market liquidity is taking a knock on account of heavy government borrowing from banking sector. This can be gauged from the fact that the government sector borrowing from scheduled banks increased to Rs.2,047 billion at the end of October, marking a jump of a whopping 62 percent compared to the same period of last year. "Although liquidity has been short for quite sometime, the banks were investing borrowed funds from OMOs into T-bills since interest rates were higher", said a money market dealer, adding that "an abrupt fall in the discount rate has thinned out appetite for sovereign instruments." Above and beyond, the lenders and borrowers are not on the same wavelength over the future interest rate direction. The cut-off yield on 12-month paper arrived at 11.90 percent in the last auction as opposed to around 12.07 percent in the secondary market. With market indecisive over future interest rate direction in the midst of lower liquidity level, the market foresees tepid participation level in the next few auctions. But, later, T-bill market is likely to resume normalcy on account of roll over of maturities, since banks have invested a huge amount of funds in 6-month and 12-month papers during the past three quarters.