The State Bank of Pakistan (SBP) likely to conduct open market operation (OMO) this week to drain excess liquidity from the money market as several OMOs would mature, resulting in lowering of the overnight rates.
The money market last week started off on a tight note with Rs 10.60 billion worth of discounting taking place between June 17 and June 20. Overnight repo rates remained near 9 percent. Respite in the tight liquidity situation came after the settlement of a T-bill auction on June 22, 2006.
The SBP held an auction of all three maturities of Treasury Bills on June 21, 2006 for settlement the next day. The pre-auction target announced by the SBP on June 19, 2006 was Rs 45 billion; total bids of Rs 14.90 billion were tendered by primary dealers from which the SBP picked up only Rs 5.850 billion.
It opted to increase the cut-off yields for six-month T-bills by 0.0436 percent bringing the cut-off yield to 8.4869 percent versus the previous level of 8.4433 percent. The three-month and 12-month T-bill cut-off yields remained at their previous levels of 8.3256 percent and 8.7907 percent, respectively.
The point-to-point differential as it stands now between three tenures of T-bills is 0.1613 percent for going from three-month to six-month and 0.3038 percent for going from six-month to 12-month along the T-bills yield curve, said Salman Jafri, fixed income dealer at Jahangir Siddiqui, in a report.
Maturities flowing into the market on June 22, 2006 amounted to approximately Rs 56.45 billion. Of these inflows, Rs 45.3 billion was due to T-bill maturity and the remaining Rs 11.15 billion was due to maturity of a nine-day injection OMO conducted in the previous week.
Outflows included the settlement value of the T-bills auctioned on June 22 ie Rs 5.065 billion. The net inflow, after accounting for the settlement value of the auction, amounted to Rs 51.385 billion on June 22, 2006. In order to curb excess liquidity the SBP conducted OMOs on June 22, 23, and 24 and picked up a total of Rs 47 billion with scattered maturities. All of the liquidity picked up in the OMOs will flow back into the market during the coming week making repeat OMOs a distinct probability, the report said.
The excess liquidity situation after the settlement of the T-bills auction caused the short-term yield curve to slip during the week with 1, 3, and 6-month repos trading at 8.32 percent, 8.43 percent, and 8.59 percent at the end of the week against last week's levels of 8.53 percent, 8.50 percent, and 8.65 percent, respectively.
The JS PGBI, which is the primary indicator of the Pakistan Bond markets, showed a decrease of 0.0084 points over the week bringing the index value to 89.2320 with a weighted index yield of 9.5955 percent on June 24, 2006. The JS PGBI has shown an overall decrease of 10.7680 percent since its inception on July 1, 2004, and has fallen 1.4551 percent since December 31, 2005.
This week the 10-year yield fell to 9.85 percent from last week's level of 9.86 percent the 5-year yield rose to 9.66 percent from last week's level of 9.65 percent, and the 3-year yield fell to 9.39 percent from last week's level of 9.4 percent.
The SBP conducted the first successful auction of Pakistan Investment Bonds on May 18, 2006 after two years of non-issuance. The 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 has fallen off to negligible levels. This is due to the fact that a large portion of the freshly issued bonds resides in the 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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