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The cut-off rates in this week’s T-Bill auction marginally came down from the previous auction. However, SBP’s attempt to communicate pause in January and handful of OMOs injection for 63 days proved insufficient to bring rates down to central bank’s liking. Government had provided the opportunity for banks to corner the market. And banks made most of the opportunity without any hesitation.

In earlier auctions (Sep to Nov), government accepted bids only in 3M papers and that has resulted in lumping of maturities and higher targets in December. That has given banks an opportunity to dictate their terms and they didn’t shy away to take full advantage while they could.

The latest auction target was for Rs1,200 billion worth bills, and government accepted Rs1,265 billion (including Rs119 Bn non-competitive bids) – Rs746 billion in 3M at cut-off of 10.59 percent (20 bps down from the previous auction); Rs396 billion in 6M at 10.45 percent (5bps lower than previous auction); and, Rs122 billion at 11.51 percent in 12M (no change from the last cut-off).

The behavior of the market suggests that another rate hike is anticipated by the market by March 2021. Cut-offs remain higher than secondary market yields. PKRV has inched up a little in papers (not bonds) after the auction, yet it is still below the cut-offs. The reason for higher cut-off is nothing but higher demand from the government. This is evident from the fall in weighted average yields – down by 27 bps in 3M to 10.39 percent, by 6 bps to 11.32 percent in 6M, while the weighted average yield has inched up by 4 bps to 11.48 percent in 12M.

This behavior clearly depicts that the easing is primarily in the 3M papers and some in 6M. SBP attempted to cover banks’ repricing risk by injecting higher OMOs for longer duration, and with a commitment of no policy rate change in January. Beyond that the market is still smelling blood. However, not everyone is thinking the same. The bid pattern in 3M suggests that some banks perhaps were ready to take chunks around 10 percent in 3M and they did bid as a good gesture. But others pounced on the opportunity to make money for their shareholders.

The government cornered itself by lumping higher maturities in December and concentrating only in 3M. The target in Dec was Rs2.6 trillion and it has mostly been achieved in the last two auctions. Since the coordination between the SBP and MoF was missing during Sep-Nov, market got the opportunity to make money, and it did.

Nonetheless, the worst part is over. In Jan, the target will be Rs1,350 billion and Rs900 billion in Feb. The ‘obedient’ boys (banks’ who acted in line with SBP’s signaling) may continue to show good behavior while the hawks may not feel so amused. The cut-off yields could come down a bit in the next two auctions.

However, interesting times shall follow soon after. The bigger question remains over what may happen in March. Inflation figures are likely to remain high. However, trend of inflation and currency shall depend upon the trajectory of the current account in the next quarter and for that the key commodity to track is oil. If oil prices remain upward sticky, banks are likely to dominate thereafter.


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