KARACHI: Contrary to the expectations of money market analysts, cut-off yields in the auction of treasury bills on Wednesday registered a less-than-anticipated decline in three- and six-month papers.

The slight drop in the yields from the Dec 15 auction was in spite of the ample liquidity that the State Bank of Pakistan (SBP) injected into the money market through open market operations (OMOs) of unusually long tenors in the last two weeks.

The SBP raised Rs1.26 trillion in the latest treasury bill auction against its target of Rs1.2tr. The cut-off yield on the three-month paper decreased 19 basis points to 10.59 per cent while that on the six-month paper went down five basis points to 11.45pc. The yield for the 12-month paper stayed unchanged from the Dec 15 auction at 11.51pc.

Yields on government papers rose sharply, especially on three-month instruments that surged 229 basis points, in the Dec 1 auction of treasury bills ahead of a policy rate hike. That led the SBP to call the sudden jump “unwarranted” in its monetary policy statement on Dec 14.

However, the yields proved sticky and stayed at the same level in the subsequent auction held on Dec 15. The SBP had to intervene in the money market by injecting liquidity to bring the yields down and reassure the market about the stability in the benchmark interest rate in the near term.

The central bank held two 63-day OMOs to lend banks a total of Rs1.07tr cash in the last two weeks. That’s why analysts expected the Dec 29 auction at lower rates than before because banks had enough cash to bid for treasury bills.

Speaking to Dawn, Pak-Kuwait Investment Company Head of Research Samiullah Tariq said the new cut-off yields are still higher than the yields prevailing in the secondary market, which shows the decline from the preceding auction is lower than expected. “One plausible reason is that banks are still concerned about external account developments,” he added.

The yield on the three-month paper in the secondary market is hovering at 10.25pc.

According to Umair Naseer of Topline Securities, the yields in the secondary market are going to go up as soon as the Pakistan Bureau of Statistics releases the inflation number for December, which will likely be 12-12.5pc.

He said the banks operated on the knowledge that the government had to raise fresh funds to retire the maturing amount given that the International Monetary Fund doesn’t want Islamabad to borrow directly from the central bank.

Published in Dawn, December 30th, 2021

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