Thanks to the governments growing appetite for fiscal financing and the banks corresponding desire for safe investment avenues, the treasury bill auctions held during the quarter ending December went remarkably well.
In the last and seventh T-bill auction of the quarter, held two days ago, the government sold around Rs99.5 billion worth of T-bills compared to the pre-auction target of Rs15 billion. Swarmed with excess liquidity, investors participated fervently by placing bids worth Rs124.9 billion.
This kind of unorthodox move by the government - to sell bills nearly 6.5 times of the target amount - didn take the market off guard as the maturity date of the huge amount of government paper were falling a day after the auction.
"The government borrowed a higher amount because in addition to the normal roll over of maturities, the retirement of about Rs57 billion worth of 3-month bills, that was raised from the first auction held in 2QFY11 (Oct 6), also fell at the end of the same quarter i.e. on December 30", a money market dealer told BR Research.
The treasury auctions during the quarter remained well-covered. With banks heavy on cash amid inflationary pressures, they scrambled for short-term papers, primarily the 3-month bill, to minimise interest rate risk.
Therefore, the government raised a total of Rs744 billion from seven auctions, compared to the total combined pre-auction target of Rs685 billion for the quarter. Around 61 percent of the raised amount was collected through the 3-month paper, 35 percent from 6-month and 4 percent from the 12-month bill.
In keeping up with the 50-bps hike in the last monetary policy, held on 29 November, the cut-off yield on 3-month, 6-month and 12-month papers, nudged up by 41 bps, 32 bps and 54 bps respectively during the quarter.
Since a sizeable portion of government T-bill portfolio is tilted towards 3-month bills in the second quarter, the government will likely be forced to jack up the next quarters auction target. A cue can be taken from the fact that the settlement of around Rs800 billion worth of treasury bills are due in the next quarter.
However, amid fears that fiscal deficit might reach 7.5 percent in the current fiscal year, amid slow development on RGST, and growing pressure from the IMF to limit inflationary borrowing, it seems probable that the third quarter auction target will be even higher.
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T-Bill auctions in 2QFY11
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Rs (bn) Pre-auction Participation Bids
Auction date Target Accepted
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5th Oct 80.0 242.5 83.8
20th Oct 95.0 228.6 122.4
3rd Nov 150.0 234.4 150.6
12th Nov 135.0 94.1 51.9
1st Dec 110.0 193.2 117.2
15th Dec 100.0 203.2 118.5
29th Dec 15.0 125.0 99.5
Total 685.0 1,321.0 743.9
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Source:SBP
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