KARACHI: Treasury bill yields jumped to 24-year high in the secondary market on Monday as investors expect hawkish signals from the central bank in its next policy meeting to curb surging inflation.
“T-bill yields have breached 15 percent in the secondary market. This is the first time since 1998,” analyst Fahad Rauf at Ismail Iqbal Securities said in a tweet. “Three-month T-bill now trades at a huge premium of 300 basis points above policy rate.”
The yield on a three-month T-bill rose to 15.26 percent. The yield on six-month paper increased to 15.12 percent. One-year T-bill yield stood at 14.87 percent. The yields have climbed by 4.9 percent so far this calendar year.
The expectations for a surge in consumer prices index (CPI) inflation because of an expected increase in fuel prices any time soon, fueling investor belief that the central bank could aggressively hike interest rates at its upcoming monetary policy review due on May 23 in a bid to tame soaring price pressures.
The new government has not been able to take tough decisions as it delayed adjustment in fuel prices amid political reasons. The government wants to take all the coalition allies on board before an increase in petroleum prices. A decision of withdrawing energy subsidies is expected to come once the negotiations for the resumption of the IMF programme starts on May 18.
“Market anticipates further increase in interest rates as inflationary pressures are likely to increase, especially after petroleum subsidy is reversed,” Rauf said. Data released from Pakistan Bureau of Statistics two weeks ago showed CPI Inflation reached a two-year high of 13.37 percent in April 2022, compared with the same month a year ago, and was 1.6 percent higher than the previous month.
The State Bank of Pakistan expects the inflation to average between 9-11 percent this fiscal year. “The MPC [Monetary Policy Committee] decision would depend upon IMF discussions. If IMF [talks] doesn't happen, interest rates can increase significantly,” Rauf added.
The SBP raised the policy rate by 250 bps to 12.25 percent at an emergency meeting held on April 7. The limited funding sources due to lack of foreign exchange inflows also compelled the government to push up yields.
The government can’t borrow from the SBP as it is in the IMF loan programme. The external financing is also drying up, so it is borrowing from the market to finance fiscal gap. “The government has very limited financing options available which is creating more demand for funds in auctions, thereby raising yields,” Rauf noted.
The latest move in T-bill yields has come on the back of heightened domestic political and economic uncertainties. The government is still unable to reveal its strategy to handle the ongoing political upheaval and mounting balance of payments crisis.