KARACHI: In the first auction of treasury bills under the new government, cut-off yields jumped by up to 70 basis points, making the returns significantly higher than the interest rate and inflation.

In the previous auction held on April 6, cut-off yields rose by up to 80 basis points and thus created a vast difference between the policy interest rate and returns on treasury bills. The next day, the State Bank of Pakistan raised the interest rate by 250 basis points to 12.25 per cent.

On Wednesday, the cut-off yield on the six-month benchmark treasury bills rose 60 basis points and now stands 1.6 percentage points higher than the policy interest rate, i.e. 13.85pc vs 12.25pc.

Despite a jump of 250 basis points, the interest rate is still below the headline inflation. The main inflation measured through the Consumer Price Index (CPI) was 12.7pc in March.

Returns have reached 13.85pc on six- and 12-month tenors

Analysts said higher returns on treasury bills are attractive, but the margins are significantly higher than the interest rate. Returns on treasury bills usually remain higher by 40 to 60 basis points than the interest rate.

“There is a possibility for further increase in the interest rate after negotiations with the IMF (International Monetary Fund) and there could be a need to curb the 12.7 inflation,” said S.S. Iqbal, a money dealer in the interbank market.

The cut-off yield on the three-month treasury bills went up 70 basis points to 13.50pc while it raised an amount of Rs291bn.

Returns on the benchmark six-month tenor increased 60 basis points to 13.85pc while the amount raised was Rs166.3bn.

Similarly, the cut-off yield on the 12-month tenor jumped 55 basis points to 13.85pc and the government raised Rs111bn.

The government received total bids of Rs914bn against the target of Rs600bn. However, it accepted a total of Rs613.7bn, including Rs45.5bn through non-competitive bids.

The trend was not different from the previous government, as the total accepted amount remained close to the target set for the auction.

During the last two auctions held on April 6 and April 20, cut-off yields on the benchmark six-month treasury bills were collectively raised by 135 basis points. Similarly, the total increase in returns on three- and 12-month papers were 150 basis points and 115 basis points, respectively.

Researchers and analysts indicated in their reports that import-related inflation has a devastating impact on the economy. They said a rise in the import bill has double negative effects — it eats up the country’s foreign exchange reserves on the one hand and stokes up inflation on the other.

Published in Dawn, April 21st, 2022

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