Treasury bills’ yield curve mostly flattens

KARACHI Treasury bills yields remained largely flat at an auction on Wednesday, a day after the central bank kept discount rate on hold at a monetary policy meeting to battle stubbornly high food inflation

The cut-off yield on three-month T-bills inched down four basis points to 13.43 percent, the State bank of Pakistan (SBP) said. The SBP sold Rs472 billion worth of shortest-tenor government paper.

The cut-off yield on six-month treasury remained unchanged at 13.29 percent, while the bank sold Rs20 billion worth of benchmark paper. The cut-off yield on 12-month MTBs stood at 13.13 percent, unchanged from previous auction.

The central bank sold Rs 99 billion worth of 12-month MTBs. The SBP sold treasury bills worth Rs590.464 billion against a combined pre-auction target of Rs500 billion rupees.

The SBP on Tuesday kept policy rate unchanged at 13.25 percent. "The result is as expected though the participation is slightly higher than anticipated," said a treasury dealer. “Auction results show banks are not too bullish in long-term rate scenario as heavy participation was witnessed in shortest tenor T-bills.”

The government planned to raise Rs2.95 trillion through treasury bills and Pakistan Investment Bonds (PIBs) in the first quarter of 2020 to finance its budget deficit.

The SBP auction calendar showed that it plans to sell Rs2.5 trillion of three-, six- and 12-months treasury bills and Rs300 billion worth of three-, five-, 10- and 20-year fixed rate PIBs in the next three months.

Moreover, the SBP would also auction Rs150 billion of 10-year floating rate PIBs. In recent months government securities attracted a record $2.58 billion in overseas cash as a number of global investors re-allocate resources to Pakistan, which is amongst the top yielding debt market in the region.

With rates falling across economies in the region, Pakistan benchmark yield at ballpark 13.1 percent is a draw-card for global funds chasing returns.

Foreign investment in short-term treasury bills exceed $2.55 billion since the beginning of the current fiscal year while longer tenor Pakistan Investment Bonds attracted $36 million as the country is seeing hot money inflows of an unprecedented level on high interest rates and exchange rate stability.

Analysts expected over $3 billion net foreign inflows into domestic debt securities during the current fiscal year of 2020. They also said the central bank is concentrating on building up of forex reserves on the basis of very risky ‘hot money’ inflows and that is why the SBP kept interest rate on hold.

The central bank, however, said recent foreign portfolio inflows reflect international investors’ improved perceptions of Pakistan’s credit worthiness. Such inflows reduce the interest rate on government debt due to the greater demand for government securities, deepen capital markets, and free up domestic banks’ resources for lending to the private sector, it added.

“The bulk of the improvement in the SBP’s reserve adequacy stemmed from the improvement in the current account—not portfolio inflows—and current inflows comprised only 3.8 percent of total marketable government debt.” As such, inflows at current levels represented limited risks. The central bank said it will continue to monitor developments carefully

and has more than adequate buffers to manage any outflows in an orderly manner.