Auction for MTBs: margin on short-term papers declines

Following a reduction in the key policy rate, the cut-off yield of short-term government papers declined up to 27 basis points in the auction held Wednesday. The State Bank of Pakistan (SBP) last Saturday reduced the interest rate by 100 basis points (bps) to set it at 7 percent down from 8 percent. The market was already expecting a cut in key policy rate; therefore, the cut-off yield had declined in the previous auction held on May 13, 2015.
State Bank of Pakistan (SBP) conducted Market Treasury Bills (MTBs) auction on May 27, 2015 for the sale of 3-month, 6-month and 12-month papers and accordingly received bids amounting to Rs 331.485 billion with realized value of Rs 320.898 billion. Most of the bids were received for short-term period as banks and other financial institutions are expecting further decline in key policy rate in coming months on the back of lower inflation. The inflation continues with its downward trajectory in this fiscal year. The year-on-year CPI inflation had declined to 2.1 percent in April 2015 from 8.2 percent in June 2014. Going forward, continuation of inflation at lower levels is reflected in the latest IBA-SBP survey of May 2015 that reports subdued inflation expectations.
In the MTBs auction held on Wednesday, some Rs 156 billion bids were received for 3-month, Rs 87 billion for 6-month and Rs 77.58 billion for 12-month tenors. The federal government accepted bids amounting to Rs 94.772 billion (Rs 90.73 billion realized value). The borrowed amount is higher than the target of Rs 75 billion set for this auction. However, the cut-off yield of all MTBs slightly declined in the auction.
The cut-off yield of 3-month MTBs was set at 6.6171 percent, down by 27 bps with accepted bids of Rs 24.97 billion (realized amount). For the 6-month, bids worth Rs 21.779 billion were accepted at a cut-off yield of 6.6511 percent down from 6.8869 percent. Similarly, the cut-off yield of 12-month T-bills, fixed at 6.7595 percent, fell by 14 bps and the government borrowed some Rs 44 billion.