MPS ditches the T-bill participants

No one knows better than treasurers-who had booked losses on their holdings of sovereign instruments yesterday-the cost of incorrect interest rate forecasts. Contrary to market expectations, which had a predicted 50 bps cut in the discount rate for the last monetary policy held two days back, policymakers kept the discount rate unchanged at 12 percent. Not to mention, twenty out of twenty seven banks and research houses contacted by BR Research predicted a cut of 50 bps by the SBP. Investors agree that economic fundamentals had pointed towards a status quo, but the market had built the forecast on the assumption that the monetary policy decision would be politically motivated, given that the discount rate cut would have been in the larger interest of the government. Secondly, their decision was influenced by an unexpected and a drastic 150 bps cut in the discount rate in the previous monetary policy, which was announced around two months back. Backing the wrong horse that market yields would decline on account of a cut in the discount rate, treasurers placed lower bids in the last treasury auction, which was held two days back. This resulted in a 14 bps, 13 bps and 8 bps drop in cut-off yields on 3-month, 6-month and 12-month papers, respectively, compared with the previous treasury auction. The mistake by lenders provided an opportunity to the government to sell its papers at the lower rate. Thus, taking the goods the god provides, the cash-strapped government accepted nearly 74 percent of the total accepted amount in the 12-month paper, which is the longest tenured paper. As the market adjusted yields upward on treasury papers in the secondary market yesterday (a day after the announcement of monetary policy), investors who tendered lower bids in the treasury auctions are now at a significant disadvantage. This can be gauged from the fact that the yield on the 12-month t-bill paper jumped to 11.90 percent on yesterday as opposed to the cut-off yield of 11.80 percent in the last treasury auction. "Around a 60 bps jump in the yields in the 10-year paper yesterday in the secondary market suggests that the market thinks the interest rates have bottomed out and will continue to remain stable in the next monetary policy," said a money market dealer. Learning a lesson from this unpleasant experience, the market will definitely give more weight to the fundamentals rather than falling prey to cognitive bias when forecasting the interest rate the next time.