The State Bank of Pakistan (SBP) is unlikely to meet its sale target of Rs 30 billion of Pakistan Investment Bonds (PIBs) for 15 and 20 years even if accepts bids at par, unless supported by sizeable corporate demand, as the bond market would ask for higher yield above the coupon rate taking the instrument in discount.
This has historically happened thrice between June to September 2001, when yield inched up by 2 to 5 basis points above the coupon rate. The coupon rates are 9 percent and 10 percent for 15 and 20-year bonds respectively.
Though auction announcement was made three-weeks earlier, but trading activity in the issued script, which is due for auction on Wednesday, June 9, remained very thin as majority of the banks preferred to adopt cautious approach.
Considering the cost factor per Rs 100 million gain or loss on one basis point would be Rs 82,000 and Rs 86,000 respectively, on 15-year and 20-year bond.
During the last 23 trading days, market estimates that net short sell position should be approximately Rs 4 billion out of which non-primary dealers must have pocketed Rs 2 billion.
The recent economic data showing sharp increase in inflation is also providing little guidance to the bond investors to invest in government debt. Whereas, due to their expensive holdings, majority of the banks are sitting long on their bond portfolio with negative yields, as they are unable to find corporate buyers, who are less likely to show interest above the par level.
Corporate are hesitant to invest, as they are also holding sizeable amount of bonds purchased at low yield and are anticipating higher interest rate.
Bond dealers are also of the view that the SBP is well placed to make its desired move when it requires shifting its stance on monetary policy. Despite pressure on banks to lower short-term lending rates to manage excessive liquidity, which pushed one-year T/bill yield to all time lows of 1.4238 percent on August 7, 2003, the central bank kept its prime rate on the hold at 7 1/2 percent, which was last slashed on November 18, 2002. It is considered that monetary policy is driven by the prime rate, while the market forces drive Treasury bill rates.
Rejection of three-month and one-year Treasury bill auction clearly indicates that the SBP is in no mood to compromise on big interest rate moves.
The pattern certainly suggests that discounted bids in 15- and 20-year are not likely to be entertained in Wednesday's auction. Market expects serious bidding in 20-year between 9.90 to 9.99 percent yield to cover short selling. Many traders with bullish view on interest rate would be bidding around 10.50 percent yields in 20-year.
A treasury manager of a European bank said, "I still fail to understand the idea to invite Rs 30 billion auction when Net Domestic Asset (NDA) is no more an issue. Corporate are keeping mum and banks are in no position to fill their belly. Instead, I would not be surprised to see rise in discount rate during the calendar year, so I would wait for more clues."
A primary dealer said, "I am quite baffled with the rejection of Treasury bill auction. The message I am getting is that a fine line has been drawn and there is a certain rate target behind the long bond auction, the SBP would most likely reject all aggressive bids.
"But if the funds are required to be drained out from the system to manage June end books, either Open Money Market Operation (OMO) will be called or another attempt to drain liquidity would be made in the coming six-monthly Treasury bills auction due on June 24, in absence of any maturity."
A treasury head of a Pakistani bank believes that the SBP will not succumb to the market pressure to hike rate and expects strengthening of yield after the close of June books. "I am looking for a minimum of 50 basis points gain on yield."
Meanwhile, rejection of three-month and one-year Treasury bills auction saw money market dealers rushing to hedge their uncovered position, 20-year bond gained 5 basis points to trade at the days low of 9.93 percent yield, but by the close of the day yield jumped to 9.98 percent on speculative selling, as the traders believed that the SBP would provide cover to short sellers at par.
There are a number of bond traders that are also of the view that yields in all the tenor would make gains of 25 to 50 basis points as correction is due after the upside rally. They said that the SBP would not accept bids at par to unnerve the jittery stock market before June 12 budget.
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