The upcoming auction of Treasury Bills would see most of the participants in three-month tenor on expectations that the State Bank of Pakistan would further tighten its monetary policy because of higher inflation.
The overnight market remained liquid throughout last week in spite of the fact that State Bank (SBP) conducted three Open Market Operations (OMOs). Total amount picked up in the OMOs was Rs 26.5 billion. The central bank mopped up Rs 6 billion through eight-day repurchase agreements at 7.9 percent, Rs 9.90 billion at 7.9 percent for seven-day and Rs 10.60 billion at 7.9 percent for six-day operation.
"Of note is the fact that the SBP has raised the OMO mop up rate to 7.9 percent from 7.5 percent," said chief dealer Salman Jafri at Jahangir Siddiqui Capital Markets Ltd. He said that this might not necessarily be a permanent change but to some dealers this is an indication that the auction of Treasury Bills, expected to be held on September 14, 2005, would herald increases in the cut-off yields for all three tenures of T-Bills.
Previous cut-off yields were 8.1000 percent, 8.1388 percent, and 8.7907 percent, respectively, for 3-, 6-, and 12-month T-Bills. Expected increases may range from 0.10 percent to 0.15 percent, and the bidding is likely to be concentrated more towards 3-month T-bills rather than 6- and 12-month instruments, as it was in the previous two auctions.
This view is supported by recent news reports quoting the SBP Governor as saying that "Now it is time to curtail inflation and apply tight monetary policy".
The SBP has sent a request to the Ministry of Finance for an auction of Pakistan Investment Bonds (PIBs) with the hope of an auction within September 2005. The timing, size, and the coupon rates of the bonds will be closely watched by Pakistan bond market which last saw a successful auction of PIBs in May 2004, with subsequent auctions being rejected.
It is estimated that the minimum coupons to be offered would be 9 percent, 10 percent, and 11 percent respectively for 3, 5, and 10 years PIBs since the one-year T-Bill is already yielding 8.79 percent, and the coupon on the shortest maturity PIB ie the 3-year would need to be higher than this (at least) to provide an incentive to investors to buy these bonds.
Last week, the 10-year bond yield moved down to 9.47 percent from previous week's 9.48 percent, while the 5-year yield moved up to 9.09 percent from 9.08 percent and the 3-year yield remained at the level of 8.98 percent.
The market saw very little trading over the past few months due to non-issuance of new bonds, and a large proportion of existing bonds being classified as 'held to maturity' by banks.
The short-term money market remained excessively liquid last week, with overnight repos trading in a wide band of 5 percent to 8.25 percent.
Some activity was witnessed in short term repos with the 1-month repos trading around 7.6 percent and 3-month repos trading at 7.8 percent.
CPI inflation numbers for August 2005 were due out by September 10-11 and are likely to show a marginal downtrend on y-o-y basis owing to a very high base effect from last year. This downtrend is not likely to have a major impact on the-12 month moving average of CPI inflation,
which is currently 9.25 percent. The rate of inflation sustaining above 9 percent and significantly above the government's target of 8 percent is a cause of concern for the fixed income markets and is likely to result in SBP's stance becoming more aggressive in the coming months.
The ADB also revised its expectations of Pakistan's GDP growth for 2006 downward to 6.5 percent from its previous estimate of 7.0 percent. The ADB has cited expansionary fiscal policy, high oil prices, and a large monetary overhang as reasons for the revision.
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