PIB auction: Racing to lock in rates

The recent hefty reduction in the discount rate echoed in the debt market, as the eligible financial institutions rushed for a piece of the action. Against a pre-auction target of Rs30 billion, the PIB auction held on Tuesday received bids worth more than Rs71 billion. It is worth mentioning here that the market had expected a rate cut in the offing in the previous PIB auction held on July 18, when bids worth Rs89 billion were received, out of which Rs48.85 billion were accepted. Given the volatile nature of the economic horizon, the bids continued to skew in favor of 3, 5 and 10-year PIBs as compared to the longer tenure government papers. Dealers contend that the markets expectations for reductions in the policy rate have not yet been quenched. "The high level of participation is indicative of expectations of further cuts in the discount rate in the near future, despite the recent reduction announced by the State Bank of Pakistan," a fund manager told BR Research. However BR Research expects the policy rate to remain stable in the foreseeable future, hence market exuberance appears irrational. The cut-off yield dipped sharply, in line with the hefty reduction of 150 basis points in the discount rate announced by the SBP, last week. For the shortest tenure PIB (3-year), the cut-off yield dipped by 137 basis points, over the previous auction to stand at 11.299 percent. For the 5-year and 10-year PIBs, the respective cut-off yields dropped by 137 bps and 128 bps, to stand at 11.699 percent and 12.049 percent, respectively. "The banks have been heavily reliant on investments in government paper instead of making advances to the private sector," highlighted another market insider. He added that, "As rates come down, the banks are eager to lock in higher rates in longer tenure government paper for trading down the line, so that they may protect their margins". The reduction in the discount rate followed by a drop in yields on PIBs has paved the way for a reduction in rates offered to savers by the National Savings Scheme (NSS). The government had introduced slight increases in NSS rates at the beginning of the current fiscal. Rates on the Special Saving Certificate were bumped up to 12.36 percent from 12.12 percent while those on Defense Saving Certificates were increased to 12.65 percent from 12.33 percent, at that time. It now seems highly probable that these and other NSS rates may be slashed in the upcoming review.