The money market remained tight during last week and after little over six months it witnessed discounting in excess of Rs 114 billion where, contrary to expectations, no injection of liquidity surfaced from the central bank.
The money market remained extremely tight the whole week, with overnight repos trading at 8.9 percent throughout. Rates remained high due to the carry-over effect of two weeks' liquidity shortages and a large pick-up in the T-bills auction held during the week.
The short-term yield curve moved higher during the week with 1, 3, and 6 months repos (Repurchase Agreement deals) trading at 8.63 percent, 8.45 percent, and 8.55 percent, respectively, at the close of the week, versus last week's levels of 8.43 percent, 8.37 percent, and 8.49 percent respectively.
Inflation numbers for March 2006 came out during the past week and showed CPI inflation slowing to 6.91 percent (y-o-y), down from 8.05 percent (y-o-y) in February 2006. The July-February average for CPI inflation stood at 8.25 percent, against the government's full-year target of 8 percent.
WPI inflation came in at 8.51 percent (y-o-y) for March 2006 versus 9.94 percent (y-o-y) in February 2006. The SBP held an auction of all three maturities of Treasury Bills on April 12, 2006 for settlement on April 13, 2006. The pre-auction target announced by the SBP on April 10, 2006 was Rs 2 billion. Total bids of Rs 17.150 billion were tendered by primary dealers, from which the SBP picked up Rs 14.850 billion.
The SBP opted to keep the cut-off yields unchanged for all the three tenors. Cut-off yields currently stand at 8.1000 percent, 8.2910 percent, and 8.7907 percent respectively for 3, 6, and 12 months T-Bills.
The result of the auction was in line with market expectations.
The point-to-point differential, as it stands now between the three tenures of T-Bills, is 0.1910 percent for going from 3 months to 6 months, and 0.4997 percent for going from 6 months to 12 months, along the T-Bill yield curve.
Maturities flowing into the market on April 13, 2006 amounted to approximately Rs 2.35 billion from maturing Treasury Bills. Outflows included the settlement value of the T-bills auctioned on April 12, 2006 ie Rs 13,663 billion. The net outflow, after accounting for the settlement value of the auction, amounted to Rs 11.313 billion.
Contrary to expectations, there were no injections of liquidity from the SBP following the auction. As a result, discounting of Rs 109.645 billion took place during the week, of which the largest quantum was witnessed on April 14, 2006 amounting to Rs 44.362 billion.
Total amount of discounting, that took place in the first 15 days of April 2006, is now in excess of Rs 114.321 billion, which is the largest quantum witnessed since October 2005 when the total discounting during the month had reached Rs 114.662 billion. The extremely large quantum of discounting is indicative of a market severely short of liquidity. It should also be noted that Rs 15.10 billion injected into the market during the previous week to relieve liquidity pressures flowed back on April 15, 2006 adding to the shortage. Heavy participation in recent T-Bill auctions was based primarily on slowing inflation and had given rise to expectations of a rate cut in the near future. "It is our assessment that the tight liquidity situation is an indication from the SBP that such optimistic expectations are premature."
The external balances took a turn for the worse in March 2006, pushing further into the red by the trade deficit, which increased to $1.16 billion from $935 million in the preceding month. This brought the cumulative July-March (9 months) figure to $8.62 billion, against the $4.26 billion figure for the same period of last year. The trade deficit for fiscal years 2005 and 2004 was USD 6.21 billion and USD 3.278 billion, respectively.
The JS PGBI, which is the primary indicator of the Pakistan Bond Market, showed a decrease of 0.0043 points over the week, bringing the index value to 90.4232 with a weighted index yield of 9.2397 percent on April 15, 2006. The JS PGBI has shown an overall decrease of 9.5768 percent since its inception on July 1, 2004, and has fallen 0.1396 percent since December 31, 2005.
This week, the 10-year bond yield fell to 9.5 percent from previous week's level of 9.52 percent; the 5-year yield rose to 9.2 percent from 9.19 percent, and 3-year yield moved up to 9.08 percent from previous week's level of 9.07 percent. Expectations of a large bond auction still prevail in the market and are responsible for keeping yields slightly higher than pre-December levels.
Expectations of a hike in the SBP discount rate have died down, of late, owing to the slowing of inflation in February and March of 2006. There has been very little trading in PIBs over the past year since there have been no successful auctions of PIBs since May 2004, and a large portion of the existing inventories has been classified as 'held-to-maturity' by banks, making them ineligible to be traded.