With interest rates down, the treasury market is not a place these days it used to be last year. Banks participation in the previous few treasury bills and PIB auctions has been rather dull, albeit expectedly. Not that the borrower would be too disturbed at missing the target for the fiscal year FY16 first t-bill auction, but it does provide an inside as to how the market perceives rates in the near term.
The recently held auction fetched around Rs103 billion, missing the Rs150 billion target. The yields remained exactly similar to the previous auction held earlier in June. Market watchers believe most investors sit pretty on decent portfolio, having earlier invested in PIBs and holding them for maturities. The sticky-ish yields hence come as no surprise.
Recall the yields had surprisingly picked up right after the monetary policy announcement. Market participants feel there is no shortage of liquidity in the market and since government still has enough appetite for borrowing, the market has not lost the price setting power. Apparently, there is no desperation in the market, on either side, hence the flattish rates.
More importantly, there is no rush to cash short term gains when investors have locked in PIBs at lucrative rates, more than making up for the potential loss in net interest margins, expected to result from the dip in interest rates.
Market participants feel that the spreads in PIBs are still healthier versus the t-bills and as long as the excessive risk-free return persists, the participation trend would continue. It remains to be seen whether the government keeps on rejecting bids in the upcoming auctions, or will the market participants succeed in securing higher yields. From what it appears, the government may have to give in as the market broadly believes the rates to have already bottomed out.