T-Bill yields hold flat as investors weigh rate outlook

KARACHI: Treasury bill yields remained unchanged on Tuesday as investors weighed the direction of interest rates following the State Bank of Pakistan’s (SBP) decision to maintain its benchmark interest rate at a record 22 percent, signaling caution about premature rate cuts.

"In today's T-Bill auction, participation of Rs890 billion was seen with the government raising Rs253 billion as against the target of Rs300 billion and maturity of Rs166 billion," said Topline Securities in a note.

The cut-off yield on a three-month paper stood at 21.6601 percent, unchanged from the previous auction held on April 17. The yield on a six-month note stayed at 21.3849 percent. A 12-month paper maintained its yield of 20.8990 percent.

The SBP, citing concerns over potential inflationary risks, held its policy rate steady for the seventh consecutive time on Monday. Despite a drop in the consumer price index (CPI) inflation to a nearly two-year low of 20.7 percent in March, down from 23.1 percent in February, the central bank noted that inflation remains high.

The SBP's monetary policy statement said the committee also noted that the inflation outlook is susceptible to risks emanating from the recent global oil price volatility along with bottoming out of other commodity prices; potential inflationary impact of resolution of circular debt in the energy sector; and tax rate-driven fiscal consolidation going forward.

“Cognizant of these risks, the Committee assessed that it is prudent to continue with the current monetary policy stance at this stage, with significant positive real interest rates."Analysts anticipate increased inflationary pressures due to the upcoming budget and expected economic reforms from the IMF programme.

"The SBP aims to observe a sustained decrease in inflation before considering any rate cuts," Chase Securities said in a market note.“Given that the next Monetary Policy Statement (MPS) is scheduled for early June 2024, it's likely that the SBP may abstain from reducing rates even then, awaiting clearer insights into the impact of the budget and IMF initiatives on inflation figures,” it added.

“Consequently, the anticipation for rate cuts might be deferred to the fourth quarter of 2024.”The delay in rate cuts could prompt adjustments in secondary market yields within debt markets, particularly Treasury Bills and PIBs with tenors of one year and above, it said.

"This adjustment is expected to lead to upward shifts in yields, considering the limited capacity of banks to offset negative funding from open market operations, a trend evident in the previous quarter's earnings reports."