In the bond market, government had shown its cards in Jan 2021 auction by accepting bids at higher rates for 5Y and 10Y papers. The flexibility was shown after a few months of rejections. In response, the market (mainly banks) had decent participation in the 5Y and 10Y papers in Feb 2021. However, banks are showing signs of greed by bidding at even higher rates. Not good. By doing this, banks are enticing government to go back into the shell. It is advisable for banks to participate heavily on the new cutoff yields. The cat and mouse game is not yet over.

Nonetheless, there is some progress. In the third week of Jan 2021, SBP gave a forward guidance on the policy rate by saying the monetary policy is to remain accommodative in the short run. Prior to that, in the first week of Jan 2021, ministry of finance broke the silence by accepting some bids in 5Y and 10Y papers. Both MoF and SBP have shown flexibility and a sense of direction.

However, in the T-Bills auction in the fourth week of Jan, 83 percent of participation was in 3M papers. This was better than a few previous auctions where there was over 90 percent participation in 3M paper. There was some increase in participation in 6M paper in Jan 2021; and government almost accepted all that – cut-off yield was up by 29 bps to 7.49 percent. The participation in 12M paper was at higher rates and government picked up a token to show its acceptance at 7.8 percent – 51 bps higher than previous acceptance.

In the first week of Feb 2021, in the PIB auction, market participated for Rs257 billion – highest participation since Jul 2020 – between Aug20-Jan21 average participation was mere Rs84 billion in all the auctions. There is some improvement. But one can smell blood. The participation was higher in 5Y and 10Y bonds – but at higher rates than what government accepted in the Jan 2021. The government did accept some at marginally higher rates – 10.05 percent for 10Y and 9.59 percent for 5Y.

However, market wants 10Y rates around 10.4-10.5 percent. That is too much of an ask. The government is cornered. There is net injection in market – with reverse OMO injection of over Rs1 trillion. There is dearth of options for government to explore – Euro bond is not happening for some reasons and government cannot knock the SBP door at all under the IMF.

Government is showing signs to follow auctions targets. Banks are not willing to accept at prevailing rates. Give and take is happening. Government is giving and banks are showing willingness to take; but at higher rates. There has to be some truce. Authorities anticipate banks to show higher interest at new cutoff rates. Let’s see how banks move in next auction. The game is on.