No rate hike in the wind

An upbeat tone is back in the treasury market, as investors were seen scrambling for sovereign paper in the first treasury bill auction of the current fiscal year, held two days back. Surpassing the governments pre-auction target amount of Rs.225 billion, the auction drew the participation to target ratio of 1.8-the highest level in the past ten auctions. Capitalising on the high demand for sovereign paper the government exceeded its borrowing requirement by accepting a total of Rs.308 billion worth of bids, which is also higher than the total of Rs.243 billion worth of papers that matured yesterday. Another noteworthy development was the shift in the investors rush towards longer tenure papers, largely suggesting that macro-economic indicators have managed to quell the economic uncertainty in the market. Participation in 6-month and 12-month paper cumulatively accounting for 83 percent of the total bids placed in the auction as opposed to a share of 22 percent in all the auctions held in the last quarter of FY12. Indicative of the broader market consensus that inflationary pressures have eased, the cut-off yield on the 3-month, 6-month and 12-month paper fell by 5bps, 2bps and 3bps, respectively. Another key driver for the positive market mood is improvement in US-Pakistan ties, which will pave the way for foreign inflows, CSF. The functioning of the countrys fiscal engine is expected to improve in the wake of lower oil prices, with impact likely to become apparent in the months coming ahead. However, conflicting signals are coming from the countrys finance department, with the government leaning on domestic sources to plug its deficits; net borrowing from the central bank increased by 36 percent during the first eleven months of the last fiscal year to around Rs.1.6 trillion at the end of May 2012. Moreover, another pressing reality is lower chances of materialistion of inflows through 3G auction and Etisalat proceeds. However, the good part is that the market expects inflationary pressures to remain subdued in 1HFY13, as positive impact arising from decline in lower oil prices will yield favourable domino effect on the cogs of the countrys fiscal system.