SBP sells Rs507 billion worth MTBs; yields remain unchanged

KARACHI: The State Bank of Pakistan (SBP) sold Rs507 billion worth of market treasury bills at an auction on Wednesday, while yields remained flat, the central bank said.   

The cut-off yield on three-month short-term government papers stood at 5.9910 percent unchanged from the previous auction held on August 16. It sold Rs426.1 billion market treasury bills (MTBs).  

The SBP sold Rs80.861 billion short-term debt at 6.0109 percent, the same as the previous auction.  It sold Rs12.262 million of on-year paper and the cut-off yield held steady at 6.0386 percent, identical to the auction held on August 2.

The government rejected bids in 12-month MTBs in the previous auction. Money market’s dealers said most participation was witnessed in the three months MTBs, as traders were reluctant to invest money in longer-tenor in anticipation of increase in inflation and interest rates in the coming months.  

Besides, the raised amount in treasury bills was higher than the target of Rs300 billion fixed by the ministry of finance, indicating that the government remained dependent on bank borrowing to finance the bulk of its budget deficit.     

Analysts foresee treasury bills to overtake Pakistan Investment Bonds by Rs1 trillion with banks being their outright major subscribers. Banks’ investment in the government securities rose 12 percent year-on-year to Rs7.4 trillion in July.  

Many analysts expect interest rates to see upward revision since the last quarter of this calendar year. However, some analysts see lesser likelihood of interest rate hike due to highly anticipated currency devaluation and subdued consumer price index inflation (CPI).

 The CPI inflation softened to 2.9 percent in July from 3.9 percent in June. “We estimate CPI inflation for the month of August to clock in around 3.38 percent; a relatively stronger number comes on the back of a lower base,” said an analyst at Alfalah Securities.

“Looking at our August to December 2017 inflation expectation of 3.89 percent we see almost no chance of a rate hike in the second half of this year. We flag that real interest rate (policy rate – inflation) is expected to average around 1.86 percent over next five months, creating sizable room for the SBP to maintain policy rate,” he said.   “We maintain our 50 basis points rate increase expectation in first half of 2018.”