The next treasury bills auction target may be smaller, but analysts expect an increase of 5 to 10 basis points in yield. The JS PGBI, which is the primary indicator of Pakistan Bond Markets, showed an increase of 0.0295 points over the week, bringing the index value to 91.0195, with a weighted index yield of 9.1529 percent on August 13, 2005.
The government would have less room and would force to raise oil prices. The impact on inflation would be another upswing due to the trickle-down effect of fuel prices increase on prices of everything else.
The inflation numbers for July 2005 are still to be published. Analysts expect month-on-month inflation to be 8.75 percent to 9.0 percent for July, while some analysts expect core inflation to touch 9 percent.
Analysts were of the opinion that core inflation near 9 percent may result in the SBP discount rate being hiked by 1 percent to 2 percent over the next six months. Leading on from this, a DR hike would give the SBP more room to hike yields on treasury bills.
The T-bills auction is due next week. Although expected to be small, in terms of pre-auction target, it may result in another 5 to 10 basis points increases in cut-off yields.
According to a report prepared by Salman Jafri at Jahangir Siddiqui Capital, the JS PGBI has shown an overall decrease of 8.9805 percent since its inception on July 1, 2004, and a fall of 7.6066 percent since December 31, 2004.
This week, bond yields moved down with the 10-Year Revaluation Yield closing the week at 9.36 percent, from 9.42 percent a week ago.
The 5-year yield remained at 8.99 percent, and the 3-year yield moved down to 8.95 percent from 8.98 percent a week ago. The decreases over the week were minor, due to very thin trading volumes.
The short-term money market remained liquid with overnight repos trading as low as in the 2.00 percent during the week. The State Bank of Pakistan (SBP) entered the market six times since August 3, 2005 via Open Market Operations (OMO), to pick up the excess liquidity left from the August 3, 2005 T-Bills auction.
In the auction, the SBP had accepted bids of only Rs 58.475 billion, against a pre-auction target of Rs 75 billion, and participation of Rs 91.775 billion. Total amount picked up via OMO was Rs 41.2 billion.
This brought the total amount picked up via the auction and subsequent OMOs to Rs 99.675 billion, which was Rs 9 billion more than the total participation in the August 3, 2005 auction. Market participants are of the view that there have been significant flows into the market from government accounts resulting in excess liquidity.
Since these flows are hard to predict, the liquidity overhang has brought down rates across the board.
In spite of these repeated OMOs, the market remained highly liquid. The SBP's inability to tighten the market via participative measures, such as OMOs, and passive tightening via T-Bills auctions is perhaps not having the impact that its 'Tightened Monetary Expansion' (TME) stance suggests. It has been ventured that tightening via participative measures is not likely to have the same impact that a one-time increase in the Statutory Liquidity Reserve Ratio (SLR) and/or the Cash Reserve Ratio (CRR) might have.
An increase in the reserve ratios would tighten the market in one go rather than resorting to tedious OMOs when OMOs are apparently not having the desired impact.
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