KARACHI, April 14: The fall in Treasury bill yields is expected to slow this week amid a growing view among banks that yields have fallen too much and is starting to hurt their profit margins.
The central bank plans to sell at auction Wednesday three-month and one-year T-bills, the sales target of which will be announced later Monday. Dealers expect a big offering, probably in the region of Rs30 billion, because of a coming Rs25 billion inflow from maturing T-bills later in the week.
Since the central bank cut its key discount rate by 1.5 percentage points to 7.5pc in November, treasury yields have been falling in line with lower interest rates due to a flood of liquidity inflows from increased remittances and seasonal loan retirements.
Banks, wary of the high risks of lending to the private sector, have been putting much of that liquidity in government securities, exerting further downward pressure on yields.
But with the yield on the six-month T-bill now at an all-time low of 1.72pc, and the country’s inflation around 3.4pc, holding T-bills effectively means low, or even negative, returns. Banks are thus increasingly reluctant to take up fresh T-bill issues at lower yields.
“In this (Wednesday’s) auction you are unlikely to see the sharp drop in yields witnessed in previous auctions. And even if there is a drop, it will be small,” said a treasury dealer at a European bank.
At the last auction on March 19, the cutoff yield of one-year T-bills fell to 2.75pc, from 3.60pc at the last auction held Feb 19. The three-month T-bills was sold at a cutoff yield of 2.008pc, down from 3.19pc at the last auction. In a sign that the market might be growing uncomfortable with the low yields on treasury paper, the dealer at the European bank noted that right after the April 2 auction of the six-month T-bill, the yield on the paper rose to 2.25-2.5pc in secondary trading from a cutoff yield of 1.72pc at the auction.
“Normally when yields were cut, the same paper used to trade at a lower yield on the secondary market. However, that didn’t happen last time (April 2),” he said.
A central bank official told Dow Jones Newswires the central bank isn’t too concerned about the sharp fall in T-bill yields because Pakistan’s monetary policy focuses on promoting cheap lending to the private sector. The central bank “has left it to the market forces to determine where the interest rates should be and has not been interfering for sometime,” he said. But market players said the central bank’s policy has created confusion in the market.—Dow Jones Newswires
