T-bills yields fall 12-year low of 6 percent

KARACHI: Pakistan’s market treasury bills yields fell across the board to a 12-year low at an auction on Wednesday in anticipation of further monetary policy easing by the central bank, which holds its rate-setting meeting next week, dealers said.
Dealers said soft inflation numbers in April and a likely cut in the central bank’s benchmark interest rate at its next monetary policy meeting are driving down yields on the debt instruments.
Yields on all maturities of treasury bills declined to six percent and that has also set stage for at least 50 basis points cut in the discount rate by the State Bank of Pakistan in its monetary policy meeting expected to be held next week, they added.
The policy rate has been reduced by 200 basis points since November 2014. Inflation rate reduced to 2.11 percent in April 2015 from 2.49 percent in March due to lower oil and food prices.
The central bank sold Rs85.637 billion of treasury bills, missing the original Rs100 billion target fixed by the government for the said target.
“The State Bank’s board of directors has space to reduce the policy rate by 100 basis points in its upcoming monetary policy review, but to be cautious, it seems to cut interest rates by 50 basis points,” an analyst said.
“If rates on short-term treasury bills sharply go down to six percent and inflation is two percent, the real interest rate will be four percent, which is equivalent to GDP growth of four percent.”
The central bank sold Rs85.637 billion of six-, three-, and 12-month government papers. It sold Rs39.670 billion worth of benchmark six-month paper at a cutoff yield of 6.8869, down from 7.2954 percent in the previous auction held on April 29. The cutoff yield on 12-month market treasury bills dropped to 6.8907 percent as against 7.2239 percent. The State Bank sold Rs23.177 billion of 12-month papers. The three-month government papers were sold at a cutoff yield of 6.8860 percent as against 7.3798 percent, while the amount raised stood at Rs23.177 billion. The bank received total bids worth of Rs88.892 billion as against the target of Rs300 billion.
Banks see the government papers are safe heavens to park their money. As, inflation is on decline and major macroeconomic indicators have improved, the investors foresee one percentage points in the policy rate, analysts said.
Banks’ frequent investment in the government treasury bills and bonds reached the investment-to-deposit ratio at 66 percent during the first quarter of this year. According to the latest auction calendar released by the central bank, the government plans to borrow Rs625 billion through the sale of three-, six-, and 12-month market treasury bills.