The money market tightened last week following two open market operations, mopping nearly Rs 32.5 billion, after State Bank of Pakistan sucked less amount in auction of treasury bills against maturity.
The JS PGBI, which is the primary indicator of Pakistan Bond Markets, showed a decrease of 0.2507 points over the week, bringing the index value to 90.1344, with a weighted index yield of 9.3695 percent on October 1, 2005. The JS PGBI has shown an overall decrease of 9.8656 percent since its inception on July 1, 2004 and a fall of 8.5051 percent since December 31, 2004.
This week, the 10-year bond yield rose to 9.47 percent from last week''s level of 9.46 percent; the 5-year rose sharply to 9.32 percent from last week''s 9.14 percent; and the 3-year yield moved up to 9.18 percent from last week''s level of 9.00 percent.
The increases in the yields over the week have been attributed to market''s anxiety over recently released inflation statistics and sporadic selling in Pakistan Investment Bonds. The market has seen very little trading over the past few months due to non-issuance of new bonds, and a large proportion of existing bonds being classified as ''held to maturity'' by banks and therefore not eligible to be sold.
Salman Jafri, money market dealer at Jahangir Siddiqui Capital Markets Ltd, said that the money market remained very tight this week with overnight repos trading above 8.00 percent for most of the week. Due to shortage of liquidity, the banks had to resort to discounting their securities with the State Bank on five occasions with the amount discounted during the week totalling Rs 52.94 billion. The tight liquidity resulted in the shorter end of the yield remaining on the higher side with 1-, 3-, and 6- month repos trading around levels of 8.01 percent, 8.12 percent, and 8.27 percent, respectively.
The SBP held an auction of all three maturities of Treasury Bills on September 28, 2005 for settlement on September 29, 2005. The pre-auction target announced by the SBP on September 26, 2005 was Rs 50 billion, while total bids of Rs 44.185 billion were tendered, from which the SBP picked up only Rs 8.735 billion.
The cut-off yields remained unchanged for all three tenures of T-Bills. Cut-off yields currently stand at 8.1000 percent, 8.1388 percent, and 8.7907 percent, respectively, for 3-, 6-, and 12-month T-Bills. Maturities flowing into the market on September 29, 2005 amounted to approximately Rs 70 billion (maturing T-Bills of Rs 58.775 bio and OMO maturity of Rs 10.7 bio). The amount picked up in the Treasury Bills auction was a whopping Rs 41.265 billion less than the pre-auction target.
The pattern of bidding witnessed in this auction was on the same lines as the previous auction with Primary Dealers preferring to invest in the shortest maturity instrument rather than the medium to longer term instruments.
However, it should be noted that the pattern was rather fractured, with bids above the previous cut-off yields not showing concentration at any specific yield point on the curve. This may in part have been due to the nearness of the end of the first quarter of FY2005-2006.
The dispersal of the bids along the yield curve shows some anxiety in the Primary Dealers as to the future direction of interest rates. The point-to-point differential, as it stands now (and as it has been for the past three auctions), is 0.0388 percent for going from 3 months to 6 months and 0.6519 percent for going from 6 months to 12 months, along the T-Bill yield curve.
Subsequent to the auction, the SBP conducted two Open Market Operations during the week to pick up the excess liquidity in the market until the next auction of T- Bills. The amounts picked up in the OMOs were Rs 27.5 billion for 14 days and Rs 5 billion for 13 days at 7.85 percent and 7.8 percent, respectively.
On both days that the OMOs were conducted, the market remained liquid until the announcement of the result, with overnight repos trading as low as 6 percent but tightening up significantly after the announcement of the OMO results.
CPI inflation statistics for September were due to be released by October 10 - 14 and are likely to show inflation persisting above the government and the SBP''s target of 8 percent year-on-year basis. Market participants are expecting the SBP to tighten monetary policy further during the course of the next quarter leading up to the announcement of the Monetary Policy for the second half of Fiscal Year 2006.