Heavy participation was witnessed in the 38th Pakistan Investments Bond (PIB) auction, the fourth in the current fiscal year, while all were reopening of previous issues. The SBP almost maintained its given PIB target amount of Rs 15 billion.
The accepted amount was Rs 15.45 billion against total offered amount of Rs 49.1 billion. The total realised amount was Rs 14.877 billion. For 3-, 5- and 10-year bonds it was the fourth issue. For 3-year bonds, market''s offered amount was Rs 6.35 billion, which has a remaining life of 25 months. The accepted amount was Rs 1.05 billion at a cut-off yield of 9.3315 percent against last cut-off yield of 9.3690 percent.
For 5 years, which shaved off 14 basis points (bps) from last cut-off yield of 9.7652 percent to 9.6197 percent, the accepted amount was Rs 800 million, against market''s offer of Rs 10.1 billion; and for 10-year paper, which has a total life of 9 years and one month, the cut-off yield fell to 10.1332 percent against last cut-off yield of 10.1988 percent. The accepted amount was Rs 6.65 billion against market offer of Rs 20.5 billion.
Major bidders in 15- and 20-year papers were pension fund and corporate sector, which was re-opening of 3rd issue of October 31 2006, which also meant that its life has been shortened by six months. In 15-year, the cut-off yield remained unchanged at 10.98 percent, and the accepted amount was Rs 950 million versus offered amount of Rs 1.65 billion.
In 20-year, which had been rejected in the previous auction, the cut-off yield fell to 11.1999 percent versus December 22, 2006 PIB auction cut-off yield of 11.4203 percent. Similarly, 30-years paper, which was also a rejected in the March 5, 2007 auction, is 2nd re-opening of December 22, 2006 issue. The accepted amount was Rs 4.5 billion at a cut-off yield of 11.5906 percent.
The last cut-off yield on December 22, 2006 was 11.7006 percent. In tenors, from 3 years to 30 years, the market witnessed fall in PIB yields. This was no change in the market sentiment, but the real cause of fall in yield was the shortened life of the papers of various tenors. The basis of yield calculation was based on yield to maturity with the days of maturity, or YTM versus DTM.
Due to demand for long-term government paper, it would be interesting to see if the SBP comes up with another PIB auction before the end of the current fiscal year, which ends in June. Therefore, the announcement could only be possible before mid-June, as trading period for when issued paper requires 15 days.
It seems that there is no set defined target for PIBs, because in current year''s budget the provision for PIB was for Rs 3 billion only, which also means that with Rs 42 billion maturity, the expectation was to raise Rs 45 billion through PIBs auction. So far, borrowing through PIBs target amount has exceeded the original target amount by Rs 23 billion to Rs 68 billion.
Looking at the initial plan for borrowing for budgetary support it was Rs 120 billion, and in 9-months the borrowing has jumped to Rs 123 billion, suggesting further rise in borrowing numbers. It is about time that in an emerging market like ours, the country''s financial managers should be prudent in their approach and instead announce a realistic number to manage its long-term borrowings.
This would also help the government in diversifying its domestic debt portfolio in a proactive way. A ratio of borrowing against long-term bond of something like 40/60 looks more appropriate.
While majority of the money market analysts are of view that the general perception of easing of rates amongst money dealers was due to softening of inflation number, what is more important is the fall in inflation number, which is still far above its original target of 6.5 percent.
The central bank is aware that the drop in inflationary figure is also due to number of steps taken at all levels, including administrative measure, which is also one of the causes of pushing current account deficit number higher.
The biggest problem that the central bank faces is the inflow of liquidity. Market estimates that on monthly basis roughly around Rs 15 billion to Rs 20 billion is flooded in the market, which requires regular mopping up through Open Market Operation (OMO) and draining of excess funds through fortnightly Treasury bills.
On Monday, the market is expected to remain long by Rs 10 billion to Rs 15 billion, due to two OMOs maturing amount of Rs 30.4 billion. SBP may prefer short dated mopping through OMOs due to coming fortnightly T/bills auction, due on Thursday, which has Rs 600 million maturity, while it is expected that because of government salary payments Rs 10-12 billion will drain out by the month-end.
Meanwhile, after the rise in FEEL, the interbank foreign exchange market is getting used to market volatility. The market has to prepare for small moves in the foreign exchange market to get it tuned, so that when the central bank decides to allow banks to make oil payments, forex market is prepared to absorb the shocks. The size of annual oil bill could range between $6.5 billion to $7 billion, or over 0.5 billion on monthly basis.
In one-month to six-month tenors, swap points lost 5 to 10 paisa. Exporters sold their forward dollars holding to take advantage of swap premium. The market is keenly watching the strength of Indian rupee, which has gained 5.8 percent since March 2007 to close at 41.60 per dollar. Many dealers are of view that Pakistan''s central bank may have to follow the Indian currency, which also helps to contain inflation. Near term, the likely ranges could be between 60.50 to 60.85.
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