After the rate hike announcement it was highly expected that the upcoming auction will attract a splurge on market participation and that is exactly what happened on September 18.
Defying the trend of subdued participation observed in the auctions conducted in the 1Q FY14 so far, the latest T-bills auction witnessed participation of Rs634.3 billion against the auction target of Rs250 billion. This was propelled by an increase of 45 basis points and 46 basis points in the cut-off yields of 3-month and 6-month papers, respectively.
To put things into perspective, lets look back at the last five auctions conducted in 1Q FY14.
Against the cumulative target of Rs1.35 trillion in the last five auctions, the government could barely churn a sum of Rs835 billion. Muted participation was a result of decline in the cut-off yields despite the fact that rate hike expectations were building before the Letter of Intent (LoI) to IMF created confusion.
Low participation by the commercial banks moved the ball into the SBPs court to satiate the government credit appetite.
Since the beginning of the ongoing fiscal year till September 6, the government borrowed a sum of Rs787.17 billion from the central bank as against the net retirement of Rs143.527 billion in the corresponding period of last year.
Contrary to this, budgetary borrowing from the scheduled banks saw a net retirement of Rs492.28 billion between July 1 and September, against the net borrowing of Rs326.25 billion of last year.
High budgetary borrowing is what that fanned the flames of Net Domestic Assets (NDA) of the banking system during 1Q FY14. And this proved to be one major contributor behind the rising inflation during the period.
Then the LoI came and it underpinned that the SBP will refrain from further net direct lending to the government because of its intense inflationary impact which essentially meant that commercial banks should feed the government. But, enticing banks to participate in the T-bills auctions was not possible until they were offered a hike in the cut-off yields.
Had the cut-off yields increased without rate hike, the policy rate would have become irrelevant to the market rates.
Hence, the discount rate hike of 50 basis points and the subsequent increase in the cut-off yields not only attracted participation in the auctions but also kept the relevance between the policy rate and market rates intact.
However, if we look at the dynamics of market participation this time around, 97 percent of the participation is concentrated in the 3-month papers with a minimal 3 percent participation in 6-month papers. Such participation pattern will not only increase the rollover cost to the government but also curb the development of long-term yield curve.
But, given the rate hike on cards, such participation in inevitable. Perhaps the spread between short-term and long-term papers should grow further to give investors an incentive to invest for long term.
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T-bills Auctions conducted in 1QFY14
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Auction Date Auction Participation Cut-off Yield
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Target Ratio 3-month 6-month 12-month
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10-Jul-13 300,000 78% 8.9747% 8.9729% 8.9817%
24-Jul-13 300,000 96% 8.9583% 8.9892% 8.9808%
7-Aug-13 300,000 63% 8.9872% 8.9836% No bids received
21-Aug-13 200,000 16% 8.9583% 8.9892% Bids rejected
4-Sep-13 250,000 36% 8.9583% No bids received No bids received
18-Sep-13 250,000 254% 9.4114% 9.4500% No bids received
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Source: BR Research.
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