Eleventh Treasury bill auction since the start of fiscal year fell in line with market expectations.
To no ones surprise, the auction was met with strong demand from investors, propelled by surplus liquidity in the market. It garnered bids nearly 1.76 times of the pre-auction target amount matching the past ten auctions average ratio (participation-to-target ratio). Out of Rs193 billion participation, government racked up bids worth around Rs117 billion.
Continuing lower acceptance than participation is against the spirit of restricting inflationary governments central bank borrowing despite the explicit mention by the SBP in the monetary policy statement. The SBP said "However, the recent rejection of the two PIB auctions in Q1-FY11 and acceptance of Rs50 billion instead of the Rs90 billion offered by the banks in the 16th November 2010 T-bill auction is apparently inconsistent with the stated intentions".
In keeping with the 50 basis point hike in policy earlier this week upward movement in the cutoff yield was imminent, which has surged by 31 bps, 19 bps and 37 bps for 3-month, 6-month and 12-month government papers, respectively, compared to the previous auction.
"Around 31 basis points bounce in 3-month cutoff yield was in proportion to market projection", according to one analyst, adding that the increase was not steeper- compared to a 50 basis points jump in the key rate --as interest rate hike to some extent was already priced in".
The high participation in the government paper auctions has stemmed from the perennial inflationary pressure, arising from high powered money creation, soaring commodity prices and burgeoning energy and fuel bills. There is speculation that RGST, if implemented, may also play a role in fueling inflation.
Moreover, savvy investors are narrowing the choice down to 3-month and 6-month T-bills as they provide leverage to minimize price risk signaling market participants anticipation that tightening is likely to continue.
As fears of monetary tightening are also casting a pall on the Treasury bond market, investor appetite for PIBs is expected to remain low in the upcoming PIB auction, fourth and last auction of 1HFY11.
Previously the government had scrapped both the PIB auctions held in the first quarter of FY11, on the back of low participation and unattractive bids, while the third PIB auction, held in October, was also not a runaway success. Besides, institutional investors are also shying away from National Savings Schemes.
On the contrary, the market is not half bad for Islamic bonds and will witness strong participation in the upcoming Ijara Sukuk auction, scheduled this month, since Islamic bank have limited investment options at their disposal.
With short term government securities yielding lucrative returns, it seems that more investors would flock towards risk free investments (treasury bills). But, the stock index didn theoretically react to the last interest rate hike, which analysts believe is due to stellar performance of a few sectors and foreign buying.