KARACHI, Sept 29: The State Bank on Wednesday deferred planned sale of one-year treasury bills because banks demanded very high yields, the acceptance of which would have signalled to the market that interest rates would shoot up. SBP did not want to send this signal.

The central bank, however, sold three-month bills and also raised its weighted average yield by a big margin but kept it below 3 per cent. By deferring sale of one-year bills and by increasing the yield on three-month bills sharply, but within the crucial level of 3 per cent the SBP has sent a right signal to the market.

"We have signalled to the market that we are committed to increasing interest rates but there is no need to raise the rates too aggressively," said a senior monetary official who declined to be named.

The SBP sold Rs17.45 billion three-month bills at a weighted average yield of 2.95 per cent, up 72 basis points from the September 1 level of 2.23 per cent, but still below the crucial level of 3 per cent.

Earlier, in the middle of this month, the central bank had raised the weighted average yield on six-month bills by 38bps to 3 per cent, the third straight increase since the start of this fiscal year on July 1.

The Wednesday's auction generated total demand of Rs39.75 billion three-month bills but the SBP sold only Rs17.45 billion bills to keep the cut-off yield from reaching 3 per cent.

Senior bankers said had the central bank decided to accept all the bids for the three-month bills, the cut-off yield would have gone up to 3.42 per cent. Its decision to sell only Rs17.45 billion bills kept the cut-off or maximum yield below 2.98 per cent.

Senior bankers said that the auction of one-year bills attracted only two bidders, one for Rs500 million and the other for Rs1 billion but both demanded a weighted average yield of more than 4 per cent.

"Most banks refrained from bidding for one-year bills because they thought that interest rates would move further up affording them more opportune times to demand higher yields," said treasurer of a private bank.

"The acceptance of these bids at four per cent plus yields would have sent a very wrong signal to the market," said a monetary official. "The market would have interpreted this is as an indication that we would raise interest rates too aggressively."

On September 1, the SBP raised the weighted average yield on one-year bills by 14bps to 2.97 per cent, which was the third straight increase since July 1 2004.