T-Bill auction: IMF Factor

The real beauty of an efficient market stems from its quickness in incorporating new information and factoring it into the market price. Trading of shorter tenure sovereign instruments is a good case in point. In simple terms, the Treasury Bill auction, held two days back, efficiently reflected a sudden 180 degree turn in market expectations regarding the upcoming monetary policy, in the light of recently released summary of the IMFs Article IV consultation. Although, the market had been eyeing a discount rate cut on the back of a slight pacification in inflationary pressures, and policy makers had also shown intent to keep real interest rate close to zero. The average inflation stood at 10.76 percent during the first seven months of the current fiscal, as opposed to around 14.25 percent same period of last year. Now, the IMFs stance - a game changer- has anchored the market expectations to status quo. As evident from the latest Treasury Bill auction, where the cut-off yields on the 3-month, 6-month and 12-month paper adjusted upward to by 14bps, 18bps and 16 bps, respectively, compared to the last auction. The cut-off yield level in the latest Treasury Bill (the third auction in 3QFY12) is close to that seen in the first Treasury Bill auction held in the 3QFY12. In essence, the market has just corrected its expectations since they had priced in an impact of a rate cut in the second Treasury Bill auction held in the current quarter. The financial institutions have also shared similar expectations in a survey conducted by BR Research, of late, where 20 out of a sample of 27 banks and brokerage house said they expect SBP to maintain status quo on the monetary front. The structure of participation suggests that investors are drifting away from the longest tenure paper, highlighting that the market now expects that interest rate has bottomed out. However, those who are still anticipating a rate cut are of a view that the government might opt for monetary easing to encourage private sector credit and spur economic growth.