Yields on three-, 6-month T-bills jump, tracking policy rate

KARACHI: Average yields on three- and six-month treasury bills rose at an auction on Wednesday after the central bank raised its key interest rate by 25 basis points.

The government raised Rs731 billion through the auction of Market Treasury Bills (MTBs), with yields increasing on short-term papers as investors expect a further rise in the interest rates in coming months.

The cut-off yield on the three-month paper was set at 7.6388 percent, up 40 basis points from 7.2347 percent at the previous auction held on September 8.

The yield on the benchmark six-month T-bills increased 49 bps to 7.9798 percent. The bids for the 12-month paper were rejected.

The central bank said it sold Rs690 billion worth of three-month paper and Rs41 billion of the six-month paper.

Analysts said the market has incorporated two rate hikes of 25 bps each in the recent auction.

“T-bill auction cut offs are higher than our expectations. This is a clear signal of monetary tightening to manage rising current account deficit,” said Mohammed Sohail, CEO Topline Securities.

The State Bank of Pakistan (SBP) has started tightening its policy stance, beginning with a 25 bps hike to 7.25 percent in policy rate on Monday.

“We believe the central bank will continue to further tightening and we expect another 25bps increase in policy rate in November 2021 MPS [Monetary Policy Statement],” the Topline Securities said in a report.

The timely change in policy direction will help avoid any drastic fluctuation in policy rate later on as seen in the previous interest rate cycles.

“We see the SBP to gradually raise policy rate by further 125 bps till July 2022,” said a report from Alfalah Securities.

According to the SBP’s MPS, the pace of economic recovery has exceeded expectations and covid-19 spread remains contained. The GDP growth rate is now expected to be near the upper end of the 4-5 percent range set by the SBP. Moreover, there is a need to keep inflation expectations anchored and slow the growth in current account deficit.

While year-on-year inflation has declined since June, rising demand pressures together with higher imported inflation could begin to manifest in inflation readings later in the fiscal year, the SBP said.

Inflation fell from 9.7 percent year-on-year in June to 8.4 percent in both July and August. Looking ahead, the inflation outlook largely depends on the path of domestic demand and administered prices, notably fuel and electricity, as well as global commodity prices.

The SBP sees food inflation remains stubborn. The base effect has been favorable, which is keeping year-on-year inflation low. The central bank is keeping a close eye on month-on-month inflation numbers.