By rejecting the bids for 12-month papers in the T-bill auction conducted on November 27, the Ministry of Finance clearly signaled the market that a rate-hike is in the offing. The result was zero participation in the 12-month papers in the subsequent auction conducted on December 11. (See BR Research column: T-bill Auctions: Borrowing cost or yield curve, published December 13)
The last T-bill auction which sucked up over Rs512 billion of market liquidity against the auction target of Rs350 billion, left the banks cash scarce, giving them grounds not to invest in PIBs (which fundamentally they are uninterested in) and hence subdued participation was expected in the PIB auctions held on December 18.
To tackle the liquidity shortage, the SBP injected around Rs30 billion at 9.95 percent in the market through reverse repo on December 13.
On the back of low expected participation, a hike in PIBs cut-off yields was also projected that would have increased the rollover risk of a huge quantum of outstanding T-bills. However, the recent PIB auction attracted significant bids worth Rs114 billion. The auction not only ended up pulling Rs55.95 billion against the auction target of Rs50 billion but also kept the cut-off yields in the check thereby reducing the spread between 6-month and 10-year papers.
To further surprise, the participation was skewed towards 10-year papers which accounted for around 66 percent of the total placed bids and 77 percent of the total accepted bids. Furthermore, after a long snooze period, 20-year papers also showed some signs of life attracting bids worth Rs500 million.
Given the rate-hike on the cards and the government interested in borrowing in shorter tenors, healthy participation in the PIB auction especially in 10-year papers and with trimmed cut-off yields seemed astonishing. A slight rise in the discount rate would incur huge revaluation losses to the PIB investors.
Market participants have told BR Research that out of the total bids accepted worth Rs55.95 billion, the banks hardly have a representation of 18-20 percent and that too to meet the statutory regulatory requirement (SLR). The rest was contributed by corporate, pension funds and insurance companies who invest in the PIBs to match their asset-liability maturities as no other attractive long-term instruments available in the market.
On the back of impending rate-hikes, the forthcoming PIB auctions are expected to muster minimal participation, at least from the banks. This will lay the yield curve development on the line. However, a one-time hike of 100 basis points may improve the maturity profile of the debt market.
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PIB Auction Profile (December 18, 2013)
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Rs(mn) Auction Target Participation Acceptance Cut-off Yield
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3-year 15,000 17,694 9,509 12.0998%
5-year 15,000 21,150 2,600 12.5589%
10-year 15,000 74,745 43,337 12.9492%
20-year 5,000 500 500 13.2894%
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Source: SBP
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