Money market remains tight

The money market throughout last week remained tight and banks borrowed funds from the discount window, forcing the central bank to inject liquidity to ease some of the pressure from the financial institutions.
The Jahangir Siddiqui PGBI, which is the primary indicator of Pakistan Bond Markets, showed an increase of 0.2065 points over the week, bringing the index value to 90.7748 with a weighted index yield of 9.1859 percent on November 12, 2005. The JS PGBI has shown an overall decrease of 9.2252 percent since its inception on July 1, 2004, and a fall of 7.8550 percent since December 31, 2004.
During last week the 10-year bond yield fell to 9.36 percent from previous week's 9.4 percent; the 5-year yield fell to 9.11 percent from 9.17 percent; and the 3-year yield fell to 8.96 percent from 9.03 percent.
The market has seen very little trading over the past few months due to non-issuance of new bonds and a large proportion of existing bonds being classified as 'held to maturity' by banks and, therefore, not eligible to be sold.
According to a report by Salman Jafri of Jahangir Siddiqui Capital Markets Ltd, the money market remained tight with overnight repos trading at 8.9 percent for the entire week.
Because of the extremely tight liquidity situation, there were two instances of discounting during the week as banks had to borrow a cumulative amount of Rs 29.6 billion (via discounting) from the State Bank of Pakistan at the discount rate of 9 percent to cover their statutory reserve requirements. The short term yield curve moved higher with 1-, 3-, and 6-month repos trading at 8.53 percent, 8.34 percent, and 8.41 percent, respectively, versus previous week's 8.46 percent, 8.32 percent, and 8.40 percent, respectively.
The SBP held an auction of all three maturities of Treasury Bills for settlement on November 10, 2005.
The pre-auction target announced by the SBP on November 7, 2005 was Rs 5 billion. Total bids of Rs 20.95 billion were tendered by Primary Dealers, from which the SBP picked up only Rs 7.65 billion. The cut-off yields remained unchanged for 3- and 6- month T-Bills. The 12-month T-bill lost 1.23 bps, or 0.0123 percent, from pervious level of 8.7907 percent. Cut-off yields currently stand at 8.1000 percent, 8.1388 percent, and 8.7784 percent, respectively, for 3-, 6-, and 12-month T-Bills.
Maturities flowing into the market on November 10, 2005 amounted to approximately Rs 9 billion from maturing T-Bills. Outflows during the week included Rs 30 billion from OMO (injection) maturities and the settlement value for the T-bills sold in the auction which was Rs 7 billion. The result was a severe liquidity crunch in the market, which has persisted continuously for the past two months. The SBP injected total Rs 37.76 billion via OMOs into the market during the week (Rs 11.48 billion on November 8 and Rs 26.28 billion on November 12.
The SBP refrained from injecting too much money into the market via OMOs and was adhering to its 'Tightened Monetary Expansion' policy by keeping the market squarish to slightly short.
"The one basis point (0.01percent) fall in the cut-off yield of the 12-month T-bill, in our view, is more of a calculation snafu on the part of Primary Dealers and SBP, rather than a coherent signal of the future direction of monetary policy. It is unlikely that the SBP, if it is indeed signalling a loose stance, will start cutting rates at a pace of 1 basis point per auction. The cuts, if and when they come, will be much larger.
The point-to-point differential, as it stands now between the three tenures of T-Bills issued via the auction process, is 0.0388 percent for going from 3-month to 6-month and 0.6396 percent for going from 6-month to 12-month along the T-Bill yield curve. The primary yield curve has, as a result of the recent auction, flattened even more.
Inflation numbers for October 2005 are already due out and are likely to show inflation persisting above government and SBP's target of 8 percent. "Our analysis points to the CPI inflation number for November 2005 ranging between 8.15 percent and 8.30 percent (year-on-year) owing largely to a very high base effect from previous year. The inflationary pressure emanating from the House Rent portion of the CPI is the largest contributor to the SBP's estimate of 'core inflation'. With 'core' bordering on 8 percent and looking to head higher, it is doubtful that monetary policy will be loosened by too much in the near future.