The State Bank of Pakistan (SBP), after almost nine months, on Wednesday raised the rates on three-month and six-month treasury bills by 22 basis points and 15 basis points, respectively.
The rates are near five-year high level. The move hints that the government would rely on borrowing in order to reduce the fiscal deficit and to encourage investment flows from banks and institutions in these tenors.
The SBP held an auction on Wednesday of all three maturities of Treasury Bills--3-month, 6-month and 12-month--for settlement on June 8, 2006. The pre-auction target announced by the SBP on June 5 was Rs 21 billion.
Total bids of Rs 31.835 billion were tendered by primary dealers, from which the SBP picked up Rs 27.835 billion. The SBP opted to increase the cut-off yields for 3- and 6-month T-bills by 0.2256 percent and 0.1523 percent bringing the yields to 8.3256 percent and 8.4433 percent, respectively, versus previous levels of 8.10 percent and 8.2910 percent. The 12-month T-bill cut-off yield remained at its previous level of 8.7907 percent.
Maturities flowing into the market on June 8, 2006 amount to approximately Rs 37.44 billion from maturing Treasury Bills. Outflows include the settlement value of the T-bills auctioned ie Rs 25.71 billion. The net inflow, after accounting for the settlement value of the auction, amounts to Rs 11.73 billion on June 8, 2006. During the current week, the overnight market has remained near 9 percent and discounting to the tune of Rs 2 billion has already been witnessed.
The point-to-point differential as it stands now between the three tenures of T-Bills is 0.1177 percent for going from 3 months to 6 months and 0.3474 percent for going from 6 months to 12 months along the T-Bill yield curve.
Salman Jafri, fixed income dealer at Jahangir Siddiqui Capital Markets, said that after a protracted period of ignoring the secondary market''''s signals, the SBP finally moved up the cut-off yields on the 3- and 6-month T-bills. The move is characteristically lacking in finesse. That said, there is nothing inherently wrong in the move itself. The alignment of shorter maturity T-bill cut-off yields with the secondary market yields on the same instruments.
For instance, the 3-month secondary market yield has remained (for the most part) above 8.10 percent (previous cut-off) since mid-September 2005 while the 6 month secondary market yield has remained above 8.2910 percent (previous cut-off) since early October 2005 (there have been a few sporadic instances when the secondary m ay ask Market yields fell below the cut-offs but these number 5 to 7 occurrences during the entire period).
And while we''''re looking back, here''''s an interesting factoid: the 6-month T-bill yield has risen to a four-and-a-half year high (last high was 8.3998 percent set on 15 November 2001). More interesting factoids: The secondary market yield on the 3- and 6-month T-bills has averaged 8.36 percent and 8.52 percent, respectively, since January 2006 with medians at 8.28 percent and 8.47 percent (3-month low/high = 8.06/8.74, and 6-month low/high = 8.31/8.76).
The 12-month T-bill remains well-anchored at 8.7907 percent and a no-change situation is perhaps the most significant feature of the auction since it indicates the same no-change stance for the Discount Rate.
The move appears to be targeted at encouraging subscriptions of 3- and 6-month T-bills which have been less attractive, when compared to the 12-month instrument''''s yield. The 12 month T-bill has seen decent subscription volumes throughout the period and remains the favoured offspring while its shorter maturity siblings have mostly been neglected.
It is uncertain at this point whether the increases will result in better subscriptions of the shorter term instruments. Those looking for the carryover trade will still resort to buying and funding the 12-month instrument rather than the shorter ones. The carry spread favours the 12 month T-bill purchase financed via 3 month repo rather than a 3-month T-bill purchase financed by a 1-month repo. Of course the longer carry trade presupposes a static Discount Rate. Given the expansionary nature of the budget FY07, this assumption of a static discount may well be put to the test but we suggest sticking it out for the near term and re-evaluating the stance in Q2FY07 (September-December 2006).
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