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There seems to be a change of heart in banks’ treasury offices. This is suggested by the decline in T-Bills yields in the last two auctions. One can say that the change coincides with increase in COVID cases and a change in the finance minister. There is a building sentiment that the policy rate is likely to remain unchanged in the upcoming policy review.

In the T-Bill auction earlier this week, the cut off yield in 3M and 6M papers is down by 7 bps and 11 bps respectively to 7.4 percent and 7.69 percent. In Mar-21, the 3M cut off yield was at 7.59 percent and is down by 19 bps. The government kept on rejecting the 12M paper. However, the bid pattern suggests that the participants have started bidding at relatively lower rates.

Machos are to be dealt by machos. Boys in treasury offices are seemingly taking the body language and statements of the new FM Shaukat Tarin seriously. There are even rumors of a rate cut. No one should stop people from daydreaming. Nonetheless, in the backdrop of currency appreciation, government’s assertion of not increasing the electricity tariff and some ease in international oil prices, inflation expectations are lowering. Hence, the increase in interest rates may not take place at a pace as was expected earlier.

The SBP has categorically said that if there is any increase it will be “measured and gradual”. One other reason for the change in expectations is that traders are now probably taking the forward guidance more seriously. SBP in Mar-21 said that the monetary policy will remain broadly unchanged in the upcoming review. Earlier people were interpreting this as a 25-50 bps increase. Now, that expectation is dying down. There are people that are even betting for no change in this calendar year.

Without delving into the debate how realistic or sustainable the market expectations are, it is time for the Ministry of Finance to capitalize on these sentiments. It should not repeat the same mistake made right after aggressive easing in 2020. When the interest rates sharply came down to 7 percent, there were some participations in the bonds at rates lower than what these are today; but ministry wanted to issue even at lower rates. That never happened and lately inflation expectations were building, and the bond yields started moving up.

Even today, the participation is mainly in 3M and 6M papers. In the last two auctions, there were high maturing amounts and targets. Market participated at higher amounts and the government has fetched Rs1.37 trillion (last auction Rs573 bn) all in 3M and 6M papers. However, between March 11 and April 22, yields in the secondary market are down by 12 to 65 bps.

The sentiments are changing, though the net injection (reverse OMO) is building and has crossed Rs2 trillion mark. This is implying that liquidity is short in the market. But recently government has raised $2.5 billion from the global debt market. There could be an international Sukuk issue as well. SBP has made some changes in the primary dealership rules to reduce the dominance of banks in the government marketable securities.

All these points add to the assertion that there could be an appetite for bonds by banks in days of easing sentiments. Ministry must capitalize that and should start picking up money in 12M papers and PIBs as well in the upcoming auctions.


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