The upward journey of market rates continues. The 3M and 6M papers yields are up by 34 bps and 25 bps respectively, to reach 7.59 percent and 7.8 percent. The intriguing factor is the deviation of cut-off yield from the weighted average yield – at 27 bps for 3M and 13 bps for 6M. That is unusual – average difference in the past eight auctions was just 2 bps. The needy behavior of government is feeding the greedy.

In 3M paper, government raised Rs509 billion at 7.59 percent. It could have fetched Rs435 billion at 7.34 percent – previous cut off was at 7.25 percent. The auction target was Rs700 billion while the government received Rs660 billion. This is not the first time the government fell short of target. It appears that the government no longer has the luxury to be short.

Next two auction targets are stiff at Rs1,050 billion and Rs900 billion. The maturing amounts are high, and the market would demand premium. The government fetched higher amount in 3M based on the offers received. It is probably expecting that the three-month policy rate would be higher, so it is better to leverage the current rate. This explains why the market is not interested in 12M paper at prevailing rates.

Inflation is not easing, and commodity prices are moving north. Monetary policy announcement is expected by the end of this week. SBP may not increase rates, but market rates have been priced higher by 50 bps already. The rate increase seems inevitable in May. It is important to see the content of upcoming monetary policy.

SBP may not increase rates proportionate to short spikes of inflation. However, banks may like to charge higher rates. The question is how to diversify debt buyers for government. In the past year, the options have decreased. Nothing for SBP nor any Euro bond in sight. Insurance, pension, and money market funds have limited appetite.

The net injection by SBP is building – standing at Rs1,362 billion. The policy rate is low and market rates are high – banks are earning abnormal profits. Thus, debt sources must be diversified. Within domestic market debt, the foreign portfolio money is one avenue. There are early signs of return of hot money. $15 million (Rs2 billion) was received in the last auction.

Yields are attractive, and global liquidity is pouring in emerging economies. Banks and SBP should increase the marketing efforts. The other avenue is RDA where over $400 million (Rs62 bn) have been received in Naya Pakistan Certificates. The rates are higher than T-Bills. Some banks are of the view that market rates must converge with NPC rates. It is better for SBP to start rationalizing NPC rates as the scheme seems to have taken off.