Monetary policy and the T-bill auction are not in sync. On Tuesday, SBP kept the policy rate unchanged, while on Wednesday, the cut-off yields are up by 96 – 130 basis points. The market got stuck to one line of MPC where SBP hinted about meeting earlier than announced meeting. Market is expecting higher rates and is bidding at higher, and the Ministry of Finance (MoF) accepted almost all- Rs951 billion were accepted against the target of Rs1,000 billion and offerings of Rs1,010 billion.
Then the timing of the auction was not in government’s favour. When the market was bidding, the oil was hovering at $130/barrel and the market was perceiving higher chance of success of vote of no confidence. The very next day, oil is down, and markets rallied. Then a few pundits are of the view that government is in-strength to avert vote of no confidence.
Does this imply the rates peaked in the last auction?
It seems so. The secondary market yields are down yesterday from the cut-off yields. The market is full of demand at higher rates while supply is low. This is implying that rates are peaking. Then a big bank got chunk of five-year bond in the secondary market (just below) 12 percent. And a few other are looking to buy. The risks to the thesis of peaking rates are uncertainties in oil prices and domestic political scene. Both can swing – especially the oil. The situation is fluid.
Nonetheless, on the face of it, SBP and MoF are not thinking alike. The policy rate is at 9.75 percent while 12M paper cut-off is at 12.3 percent. This rate is even higher than the secondary market yields of 10Y paper.
In the last auction, the 3M paper cutoff yield stood at 11.45 percent (up by 96 bps from the previous auction). The government fetched Rs511 billion against the offering of Rs561 billion. The weight average yield stood at 10.99 percent – the gap between the cut-off and weighted average yield stood at 46 bps. This is much higher gap than the usual gap.
Similar is the story of 6M and 12M papers where the cut-off yields are up by 121 and 130 bps respectively to 12.1 percent and 12.3 percent whereas the gap between the cut-off and weighted average yields are 28 and 33 bps respectively. The government has accepted Rs266 billion and Rs143 billion against the offers of Rs276 billion and Rs173 billion respectively.
Some say that government’s maturities are piling up and this no borrowing from SBP is making government to accept whatever is being offered. Otherwise, it would have been a repeat of Dec 2021 in April 2022. As the government was more interested in maintaining cut-ff yield during Oct-Nov and got in a tight spot in Dec. There is another school of thought that is saying that government should have accepted less and could have used its Rs1.2 trillion worth of deposits lying with the SBP.
Anyhow what is being done is done. Let’s see how the yields move going forward. Keep a close eye on PIBs auction next week. Here the target is low, and government must not be generous in accepting anything being offered.
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