KARACHI: The State Bank of Pakistan on Wednesday reduced the cut-off yield on treasury bills (T-bills) by up to 50 basis points, while the government raked in the entire amount offered by banks.

The T-bills were sold for the first time after the monetary policy announcement and the auction reflected the decision taken in monetary policy. The policy interest rate was cut by 50 basis points to 9.5 per cent.

Dealers said the market was expecting a cut in the T-bills rates after the reduction of policy interest rate and particularly after a big strange cut in the rates of Pakistan Investment Bonds (PIBs).

The cut-off yield on three-month T-bills was reduced by 47 basis points to 9.45pc; yield on 6-month papers was cut by 48 basis points to 9.49pc, and for 12-month paper, yield was slashed by 50 basis points to 9.49pc.

The market was still filled with speculations that the interest rate may see another cut in the next policy in January as it may result in higher investment for long-term papers.

Of the total investment of Rs181bn, the investors parked Rs36.6bn for three months. The six-month T-bills attracted Rs122bn while 12-month papers invited an investment worth Rs127bn.

The government has set a target of Rs980bn for the quarter November-January. The market experts felt that the government might be thinking to change its path for borrowing as costly PIB borrowing invited serious criticism by experts and other stakeholders.

The government has accumulated Rs3.5 trillion through PIBs and most of the money was raised in the fiscal year 2014. The rates on the PIBs were slashed in the last auction held after the introduction of the interest rate cut.

Dealers said the government set Rs150bn selling target for PIBs for the quarter November-January which was a clear message to the market that borrowing strategy has changed.

However, in the last auction the government picked up entire amount of Rs150bn offered by banks instead of Rs50bn target.

The cut-off yield on three-year PIBs was slashed by 1.59pc to 10.89pc, for five-year PIBs by 1.87pc to 11.10pc and for 10-year by 1.45pc to 11.99pc.

This major slash visibly reduced the margin of profits between T-bills and PIBs, but PIBs are still offering much attraction for banks, particularly in the wake of falling inflation.

Published in Dawn, November 27th , 2014