KARACHI, Aug 17: The State Bank on Tuesday scrapped all bids for long-term government bonds as the government was not interested in borrowing money through these bonds at high rates.
This indicates that on Wednesday the central bank will allow a very modest increase in the six-month treasury bills yield - or will try to keep it unchanged at the previous level of 2.52 per cent. (The SBP is due to sell Rs35 billion six-month TBs on Wednesday).
A sharp increase in the six-month TBs yield seems to be out of question also because it will automatically increase export refinance rate - and that is something the central bank will not allow.
The export refinance rate moved up by half a percentage point to 2.5 per cent in August because of a 45bps increase in the yield on six-month TBs. As a result, the maximum mark-up on export financing rose from 3.5 per cent in July to four per cent in August. Central bankers say the SBP wants to keep this rate unchanged for a couple of months.
The bankers said the SBP rejected Rs4.3 billion bids for three-year, five-year and 10-year Pakistan Investment Bonds (PIBs) without giving any reason. But a source close to the SBP said that the bids were scrapped because the ministry of finance did not want to borrow money through the PIBs at high rates. The bidders had demanded 5.40-6.09 per cent return on three-year bonds, 6.33-7.00 per cent on five-year bonds and 7.85-8.25 per cent return on 10-year bonds.
The yields demanded by the bidders were in line with the coupon rates of six, seven and eight per cent on three-year, five-year and 10-year bonds, respectively, and closer to the yields at which these bonds were trading in the secondary market.
The bankers said the SBP could have sold Rs1 billion each of the three tenures of bonds if it agreed to offer a cut-off yield of 5.8 per cent for three-years; 6.85 per cent for five years and eight per cent for 10 years.
In the last auction of the bonds held on May 29, the SBP had offered a cut-off yield of 4.35 per cent on three-year PIBs; 5.35 per cent on five years and 7.36 per cent on 10 years.
But insiders say the government had allowed these cut- offs on PIBs a bit reluctantly. "That was why the ministry of finance had a final word on determining the yield on PIBs in Tuesday auction," one of the insiders told Dawn.
Sources close to the ministry of finance defend this decision on the ground that the very purpose of announcing a small target of Rs3 billion for Tuesday's PIBs auction was to keep their yields closer to the previous levels.
They say that allowing the yields to rise from their previous levels to the levels needed for borrowing Rs3 billion through the PIBs would have fuelled expectations of a quick increase in interest rates. "This is something that both the government as well as the State Bank want to avoid," one of the sources said.
In its monetary policy for July-December 2004 issued last month, the State Bank indicated that it would have to increase interest rates to fight rising inflation, but it made it clear that this would be done gradually.
