The State Bank of Pakistan has allowed the yield on one-year treasury bills to cross the two percent mark, signalling to the market to gradually raise lending rates as the inflation has started picking up.
On Wednesday, the State Bank of Pakistan sold treasury bills worth Rs 21 billion at a cut-off yields of 1.5699 percent on three-month TBs and Rs 20.97 billion for one-year TBs at a cut-off yield of 2.0464 percent, raising the yield by 4 and 6 basis points, respectively, (a basis point is 0.01 percentage point).
The psychological barrier of 2 percent yield in one-year has finally been breached after making a number of attempts during last five auctions.
It was in July 2003 that last cut-off yield was at 2.17 percent, before hitting the all-time low of 1.42 percent in August 2003, followed by a bounce back to 1.9 percent in September 2003, but was unable to break the mark.
"There is plenty of liquidity in the market; hence, the rupee market is likely to remain liquid despite draining of Rs 41.12 billion from the system. March is an important month as net domestic asset (NDA) obligation needs to be within the target. Therefore, calling two open market operations (OMO) before quarter-end will not surprise the banks," said a treasury head of a Pakistani bank.
A chief dealer of foreign bank said, "The current pace of rise of Treasury Bill yield is very encouraging, unlike what we saw in the past. This certainly helps us to plan according to the market condition and provides ample opportunity to both, the banks and the borrowers, to adjust accordingly."
Money market dealers estimate that market would still remain liquid by Rs 8 billion to Rs 10 billion for the next two days.
There is sufficient liquidity in the system that would enable banks to meet the weekly average reserves requirement. Another amount of Rs 12 billion OMO maturity is due next on Monday, March 22.
Against the auction target of Rs 45 billion, the SBP only picked Rs 41.7 billion. "Had SBP adhered to the target, then yield on one-year would have moved 10 basis points in one go. This would have indicated to the market to raise rates but with a six basis point movement, SBP is hinting to the banks to only gradually raise the rates," said a treasury manager.
The money market was also abuzz with expectations of a Jumbo long-term Pakistan Investment Bond issue in the range of Rs 50 billion to 70 billion during the last quarter of the current financial year.
The 10-year PIB was trading around 6.37/6.38 percent on the secondary market. But corporate buyers still are sitting on the fence in expectation of rise in yield of long-term bonds.
Once the Jumbo PIB issue is announced the market expects yield on PIBs to improve. "Only when some sort of certainty is in place, then only the corporate buyers would become active," said a treasury manager.
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