Treasury auctions sounding good

Investor behaviour in treasury auctions is a usual indicator of future economic and market direction. However, treasury auctions become more noticeable if there is an abrupt change in the market response after a long span of time.
It came as a good surprise that the disarray in the treasury auction market, which began at the start of the current fiscal, has lessened after the SBPs last monetary policy decision, when it kept the discount rate unchanged at 14 percent.
As the interest rate environment is expected to remain stable in the current quarter, on account of the improvement in fiscal indicators, the fourth T-bill auction in the third quarter of the current fiscal year saw stability in cut-off yields. The cut-off yield for the 6-month and 12-month paper remained static at 13.68 percent and13.85 percent, respectively, while 3-month bills saw a drop in the cut-off yield by around 5bps.
In line with a Rs150 billion pre-auction target, the treasury department sold around Rs147 billion worth of bills. While the auction drew a bid-to-cover ratio (the value of bids received divided by the value of bids accepted) of 1.8, compared with an average ratio of 1.2 for the first two treasury of the current quarter held in January, a higher ratio indicates strong demand, primarily, arising from high liquidity in the market
The factors such as drop in CPI in January, a record high foreign reserves and shift in government borrowing pattern - the government has been tilting its borrowing portfolio from the central bank to scheduled commercial banks - are pointing to a stable outlook of the rupee. Currency stability is one of the key economic indicators in predicating outlook of the discount rate.
The participation structure, with around 68 percent and 24 percent participation in 3-month and 6-month papers, respectively, was close to the previous auction held earlier in February. But this is different from the average composition of participation; around 85 percent in 3-month bill and 8 percent in 6-month bills, was seen in the first two auctions held in the third quarter.
This indicates that at present, relatively more investors expect interest rates to remain stable in the next few months, than they were in the recent past.
Although inflationary pressure has subdued for a while, increasing oil prices in the international market strike a chance that the government might transfer the burden of the oil price hike to consumers in March. If that is the case, high participation in 3-month papers and growth in cut-off yield might be the order of the day in the next treasury auction.