The bid pattern of this week T-Bills auction brings no surprises. The market is expecting another rate hike in May 19 monetary policy review. All the bids were virtually in 3M papers while absolutely nothing was in 12M paper. Government decided to pick Rs416 billion at 11 percent against the target of Rs350 billion, whereas the bids were at Rs2,798 billion and had the MoF picked it all, the rate would have been 11.05 percent.
The bidding pattern this week was no different from many of the previous auctions. However, the MoF response was different. A fresh wave of thinking could have been brought by the new DG debt, as for the past few months the position was vacant. In recent auctions, the usual interest has been in 3M papers with no issuance in 12M since Sep 2017. The interest rates started heading north since January 2018 and currency depreciation started in Dec 2017.
With around 5-6 quarters of tightening, the market is parking in short term papers and the cycle has not ended yet. The rates are moving up in tandem to the policy rate movement. The policy rate is at 10.75 percent and the recent cut off is at 11.0 percent. In the previous four auctions, the 3M cut off ranged between 10.53-10.55 percent while the policy rate was 10.25 percent. The market movement is at 20-25 bps spread over policy rate in 3M papers while nothing else to talk about in 6M and 12M papers.
The trend is likely to continue in upcoming auctions. The catch is what would the DG debt do on May 8 and May 22 auctions where cumulatively Rs2.68 trillion worth of papers are maturing and the government target is Rs2.6 trillion - collectively for both auctions. The monetary policy announcement is by the end of May and the market would not have any interest, but in 3M papers.
Seeing what happened on April 10, the DG debt has to settle on higher bids than those rejected earlier this week. The market is expecting around 100 bps increase in interest rates and then the rates may start coming down by 4Q of 2019 or 1Q of 2020. Thus, the treasurers want to limit the exposure before the rates start coming down.
At this point, a bank can borrow from SBP OMO injections at around 10.80 percent and 3M paper is at 11.0 percent. Post May, if the SBP increases the policy rate by 50 bps, borrowing rate would increase to say 11.30 percent and the spread on existing T-Bill would be negative till maturity. Today, the spread is positive for 45-50 days and it would ne be negative for remaining 40-45 days, given interest rates are to increase by 50 bps in next MPS.
Closer to the policy rate, the banks would want higher rate to compensate for higher period of negative spread. It is hard to reject May auction bids as the government has to move towards SBP borrowing which would be against the IMF conditions. Or does it want the market behavior to change to lower the 10Y PIB yields? Only time will tell. But if the market knows this equation, DG debt surely would have this in mind. So, his game plan is unknown. Nonetheless, it is a bold move.
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