You sow what you reap. Government wanted to improve the debt maturity profile in the name of improving long-term yield curve. And it got just that. Investors completely neglected the T-bills on offer, as the latest auction fetched a paltry sum of Rs4.7 billion, against the target of Rs100 billion. Needles to say, whatever little participation there was, it came in 3-month paper, while the 12-month paper had no takers.
Disconnect-between inflation and government bond yields-has never been so obvious in recent memory. The idea for participants is simple.
Flock to the PIBs which offer mouthwatering risk-free returns, with a healthy spread of two percent. No rocket science then that the T-bills would not attract many when they offer hardly 10 percent return.
The government seems pretty content with raising debt at such hefty rates and the big bosses would not be too displeased about it either.
"As long as there are excessive risk-free returns on offer in PIBs and spreads are good versus the T-bills, this trend would continue. The market expects status quo in the next 2-3 rounds of MPS," said a market participant from a leading bank.
This sums up the markets mood. Expect the banks asset portfolios to take major shifts as crowding out of the private sector is now fast becoming a reality-and no more just a threat.
The governments desperation for money and more money is so obvious that the banks do not need a second invitation to answer the debt call.
Not that the banks had started lending aggressively to corporate in the recent past, but the ongoing madness will ensure they move further away from private-sector lending.
And it makes sense, too, for the banks. Not even the best of corporate lending can yield returns as lucrative as 13.5 percent, and that too, on sovereign risk. The banks might as well beef up the treasury departments. Internal rotation from corporate lending departments would not be a bad idea.
After all, it is better to use your resources, than to sit idle.