The PIB lust

As expected, the 50 bps discount rate cut brought down the PIB yields to earth. What came unexpected though was governments keenness to welcome whatever came its way. The PIB auction target was set at Rs50 billion, and the realised amount was nearly three times the target. It shows more desperation and the urge to comply with the IMFs requirements, as it was the last auction before the expected tranche release.
The market participants who did not take a backseat despite significant cuts in yields in all tenures, too, took it as a surprise. There is no denying the government is eyeing to meet its financial requirements, and in the process, it is relying less on SBP borrowing and more importantly getting close to the NDA target agreed with the fund.
For banks, the spreads are still intact, as despite the cut in yields, spreads still look lucrative enough. There, however, is the risk of another rate cut, which the market anticipates sooner than later. Most big banks having invested heavily in PIBs and having a huge chunk in available-for-sale securities, they would be eying to book capital gains.
One market participant cautioned that banks could land in trouble if they continue to take the bait, as other than the one-off gains, lower interest rates could mean bonds becoming more of a liability. "There is a certain threshold at which the mood will swing in favour of short-term bills and we are very close to that threshold," said a treasury manager from one of the big banks.
And treasury bills have already started getting more attention after going through a dull phase for almost the entire previous quarter. All said, it would help if the government could be reminded that it has to pay back whatever it is borrowing in the name of improving the long-term yield curve and improving the maturity profile. Disconnect between the interest rates and PIB yields still persists, which has all the ingredients to be troublesome going forward.