KARACHI, Dec 8: The State Bank of Pakistan (SBP) on Wednesday scrapped all bids for six-month treasury bills apparently to avoid a sharp increase in their yield.
The action upset most banks for they were anticipating that the central bank would raise the yield to reinforce its earlier signals of tightening the interest rates to contain soaring inflation.
SBP Governor Dr. Ishrat Husain said in an interview with Dow Jones newswires on Monday that inflation "will exceed 5 per cent, but not by a great margin." Prime Minister Shaukat Aziz, however, hinted in his last weekend meeting here with heads of multinational companies that it may close around 7 per cent. In the first four months of the fiscal year, inflation averaged at 9.06 per cent year-on-year.
Bankers said that Wednesday auction of TBs generated Rs8.115 billion demand against the target of Rs30 billion. They said all the bids were priced at 4 per cent plus, ranging between 4.2-4.4 per cent, up from the last weighted average yield of 3.74 per cent.
The SBP rejected all the bids as it was not ready to raise the yield to these levels, because that would have set the stage for even sharper increases in future. Since the start of the new fiscal year in July, the central bank has been raising TBs yields slowly to check inflation but has never raised them aggressively in one go. It has even scrapped a few TBs auctions altogether to avoid a higher-than-desired rise in the T-bills yields.
A sharp increase in the average yield on six-month bills raises the export refinance rate for the next month. And rising T-bills yields, of all maturities, also depresses the bullish mood of the stock market.
The stock market is currently witnessing a strong bull-run and on Wednesday, Karachi Stock Exchange 100-sahre index closed at 5698, up from 5567 at the end of last month. When TBs yields rise, this signals tightening of interest rates and that, in turn, means that equity investors can switch over to bank savings.
On the other hand, rising interest rates depress corporate earnings and thus limit their ability to give higher dividends. Over time, this reduces the interest of the investors in stocks. But Mr Yasin Lakhani, a former KSE Chairman says "there is no immediate impact of a change in T-bills yields on the stock market. If there is one, it is purely psychological."
He, however, admits that rising TBs yields do serve as a prelude to higher interest rates and that have a depressing effect on corporate profitability over a period of time. "So in a long-term context, yes, the change in TBs rates can affect the stock market sentiments."
The SBP raised the average yield on six-month bills by 166 basis points to 3.74 per cent between July-November 2004, as part of its interest rates tightening to fight inflation.
This indirectly increased the mark-up on export loans to 5 per cent for December from 3.5 per cent in June. But during this period, the stock market continued to grow. The KSE-100 share index rose to 5,567 at end-November from 5,279 at end-June 2004.
"This shows that a mere increase in T-bills rates do not affect the stock market," says Mr Lakhani. "Of late, banks are making expensive bids for TBs to prepare grounds for increasing their own lending rates," Mr Lakhani charged while talking to Dawn over telephone.
Central bankers also say that banks sometime demand very high rates on T-bills leaving the SBP with no option but to raise the rates to their satisfaction or scrap the bids.
"Today's auction is yet another example," said a senior central banker who was of the view that banks made an attempt to let the TBs rate cross 4 per cent mark without even showing a big appetite for the bills. "If this was not so, why then the market participation was so low (Rs8.115 billion bids against the TBs sale target of Rs30 billion?" he asked.
But treasurers of local and foreign banks said they had priced the bids keeping in view their own liquidity positions. One of them even pointed out that the SBP was to be blamed partly for this low participation.
"When we lock enough funds in TBs and go to SBP discount window next day to borrow overnight funds, they immediately warn us to manage our liquidity," he complained. "And when we keep part of liquidity with us (and do not participate in TBs auction in a big way), they blame us for not participating in the auction.
