T-bill auction

Buoyed by a healthy participation level, the first treasury bill auction of the quarter (4QFY12), held two days back, managed to sell around Rs140 billion (face value) worth of papers.
Behind the relatively better liquidity level is around Rs163 billion worth of treasury bills maturing a day after the auction and a sizeable OMO injection earlier this week. It is pertinent to note that lower liquidity had resulted in a weak participation level in the previous three treasury auctions held in the previous quarter.
Hence, with a total participation level of around Rs192 billion, the auction drew a participation to pre-auction target ratio of 1.2.
Investors scrambled for shorter tenured papers, as the combined participation in the three-month and a six-month papers accounted for nearly 96 percent of the total participation.
This is due to an uncertain interest rate outlook and the growing market concern that inflationary pressures will exacerbate down the line. Factors such as a high budget deficit, drying external flows, rise in energy costs and possible threats of oil prices rising in the future point towards growing inflationary pressures. Hence, investors shied away from 12-month papers to minimise price risk.
In the face of a hefty participation level, the cash-starved government took a hard line by accepting fewer bids, nearly Rs20 billion shy of the pre-auction target level, in order to keep the cut-off yields constant at the previous auctions level.
The cut-off yield on the three-month, a six-month and a 12-month papers stayed unchanged at the previous auctions level of around 11.87 percent, 11.94 percent and 11.94 percent, respectively.
The government and the lenders were seen at odds over the direction of the interest rates in the previous few auctions.
The cash strapped government aims at selling a total of Rs995 billion worth of papers in the current quarter. The lower liquidity level in the market, and harbingers pointing towards inflationary pressures, might force the government to drive a hard bargain with the lenders.
But, taking into consideration that around Rs964 billion worth of papers were due to mature in the current quarter, and since the lenders are reluctant to extend credit facilities to the private sector, the quarters pre-auction target does not appear to be a far-fetched target.