KARACHI: Cut-off yields on treasury bills were increased by up to 49 basis points in the auction held on Wednesday — the first such big increase during the last 15 months — while most of the bids were received for short-term three-month papers.

The auction target was Rs800bn but the government raised Rs731bn against the total bids of Rs1,171bn.

The increase in cut-off yields was warmly welcomed by investors as reflected from the amount offered to buy the papers. Bids of Rs842.3 billion were offered for three-month T-bills, the highest for any tenor from three- to 12-month. The short-term investment also reflected that investors were expecting further increase in State Bank of Pakistan’s (SBP) policy rate in the coming months.

The SBP on Sept 20 raised its policy rate by 25 basis points to 7.25pc after 15 months and hinted that the rate could be increased with a slow pace if required — it means there will be no major jump in the interest rate in the coming months.

Due to Covid-19 the central bank slashed the interest rate from mid-March to June 2020 from 13.25pc to 7 per cent. The drastic cut was introduced to provide cheaper money to the economy in order to protect it from a serious negative impact which had turned into a global phenomenon.

With the increase in interest rate the SBP said the time has come to protect it from overheating that may be inflationary. The impact of interest rate hike was visible in the auction of treasury bills.

Against an auction target of Rs200bn, the government raised Rs689.8bn for three-month T-bills at 7.64pc, an increase of 41bps compared to 7.23pc in the previous auction held on Sept 8, indicating the change of mind of the government after increase in the policy rate.

The government increased the yield on six-month papers by 49bps and raised Rs41.1bn against the total bids of Rs231.1bn. The target was Rs200bn for the tenor.

However, the government rejected all bids for 12-month papers for which the auction target was Rs300bn. The bids received were Rs97.5bn.

Investment bonds

The government also raised Rs72.8bn through auction of Pakistan Investment Bonds (PIBs) but the amount was almost half of the Rs150bn target set in the auction calendar.

An amount of Rs3bn was raised for two-year bonds against the bids of Rs6.25bn while Rs72.05bn was raised for three-year against the bids of Rs110.55bn. It also raised Rs871m through non-competitive bids.

Analyst said the increase in T-bills rates would help to attract foreign investors who are interested to get higher return but were reluctant after regime change in Afghanistan. They said the fall of Kabul had negative impact as it created uncertainty in Pakistan also. They said this was the reason for higher outflow of foreign investment in equities from Pakistan while it damaged the exchange rate at the same time.

“Until a government is settled in Kabul with peaceful administration, the element of uncertainty would remain in Pakistan particularly on economic front,” said S.S. Iqbal, a senior money market dealer.

Published in Dawn, September 23rd, 2021