PIBs yields hint at rate cut

The government still needs money to run its affairs and it is still borrowing. Only that the tides have changed, from PIBs to treasury bills. As the interest rates recede, the once lucrative double-digit bond yields have come down significantly. The latest PIB auction helped government to fetch Rs67 billion - easily above the target of Rs50 billion. It also made up for the Rs10 billion missed in the previous auction.
There was absolutely no desperation to be seen on either end. The borrowers were happy fetching Rs67 billion at low rates and the lenders were happy getting what they did. Recall that most of the investors already sit heavy on PIBs locked in the previous year, at mouth watering yields. The interest rates have dipped considerably, forcing market participants to think twice before locking in government papers at current rates.
The 3-year PIB yields are now back to less than 8 percent, after having climbed in the previous auction. The cut-off yields on the 3-year papers, which also form the bulk of accepted bids, were down by almost 50 basis points from the previous auction. The yields on 5-year paper also faced an almost similar fate. The market participants believe that the market has given a clear enough signal as regards the interest rates. Contrary to the earlier perception of interest rates having already bottomed out, the market still sees room for another 50 bps cut.
The government on the other hand too, is not too keen to repeat the previous years mistake of accepting bids at very high yields - as reflected by two-thirds of bid amount that was rejected. Don mistake the dull participation in PIBs for a change in heart of the banking sector though. Most banks are still comfortable booking government papers - the only shift has been from long-term to short-term, as enough gains are there to be made on the earlier invested PIB portfolio. The signal is pretty clear - the market is pretty sure of another rate cut in the next monetary policy.