The State Bank of Pakistan (SBP) is likely to set a target of Rs 35 billion at the treasury bills auction schedule for next Wednesday where rates may remain unchanged.
The money market remained excessively liquid last week in spite of the two Open Market Operations conducted by the State Bank. The OMOs resulted in Rs 4.00 billion and Rs 16.2 billion, being picked up for periods of 5 days and 6 days at 8.50 percent and 8.25 percent, respectively.
Salman Jafri from Jahangir Siddiqui Capital Markets Ltd said that the maturities of these OMOs would fall on June 5 and June 8 and would coincide with an expected auction of Treasury Bills. Rs 21.24 billion is also due to flow back into the market on June 8 from maturing T-bills. This would bring the cumulative inflow during the week to Rs 41.44 billion. Keeping in view the excess liquidity already available in the market and sizeable inflows during the coming week, the SBP is likely to announce a pre-auction target of Rs 25 to 35 billion for next week's T-Bill auction.
Cut-off yields are likely to remain at previous levels, and the auction is likely to be well received owing primarily to excessive liquidity.
The source of the current liquidity surfeit in the market is the subject of much speculation and rumours point to it as being the result of SBP accessing the interbank foreign exchange and swap markets to pick up dollars and inject rupees. The liquidity situation caused the short-term yield curve to move lower during the week with 1, 3, and 6 months repos trading at 8.33 percent, 8.40 percent, and 8.58 percent respectively at the end of the week, against last week's levels of 8.54 percent, 8.58 percent, and 8.67 percent, respectively.
BOND MARKET: The JS PGBI, which is the primary indicator of Pakistan Bond Market, showed a decrease of 0.0984 points over the week bringing the index value to 89.4138 with a weighted index yield of 9.5772 percent on June 3, 2006. The JS PGBI has shown an overall decrease of 10.5862 percent since its inception on July 1, 2004 and has fallen by 1.2543 percent since December 31, 2005.
During the week, the 10-year yield rose to 9.86 percent from previous week's level of 9.84 percent, the 5-year yield rose to 9.65 percent from the level of 9.63 percent, and the 3-year yield rose to 9.41 percent from 9.39 percent.
The SBP conducted the first successful auction of Pakistan Investment Bonds on May 18, 2006 after two years of non-issuance. Cut-off yields for 3-, 5-, and 10-year PIBs rose to 9.4515 percent, 9.6674 percent, and 9.8746 percent respectively from levels of 4.3506 percent, 5.3492 percent, and 7.3698 percent. In the period since the auction, trading volume had fallen off to negligible levels. This was due to the fact that a large portion of the freshly issued bonds resides in corporate sector inventories and is unlikely to be traded since the corporate sector typically holds instruments to their maturity rather than actively trading in them.
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