Treasury bills yields slide; moderate rate hike likely

KARACHI: Treasury bill yields edged down on Wednesday in a sign that investors’ fears about an aggressive policy stance from the central bank to curb soaring inflation have abated for now.

The yield on the three-month T-bill fell 29 basis points (bps) to 14.50 percent, the auction result from the State Bank of Pakistan showed.

The cut-off yield on six-month paper moved 29 bps lower to 14.70 percent. Yields on 12-month paper inched down by five bps to 14.75 percent.

The government raised Rs300 billion through the auction of T-bill against the target of Rs500 billion. The SBP received bids of Rs1.008 trillion.

“The government picked lower than target amount. That’s why the cutoff remained lower than the previous auction,” said Samiullah Tariq, the head of research at Pak-Kuwait Investment Company.

Analysts said the recent volatility in the money market in recent days has come on the back of lingering fears of rising inflation, and increasing uncertainty on the economic and political fronts.

“The SBP’s Monetary Policy Committee (MPC) is scheduled to meet on Monday, 2022, wherein we expect the MPC to raise the benchmark policy rate by 100 bps, '' said Mustafa Mustansir, the head of research at Taurus Securities Limited in a research note.

“Our expectations emanate primarily from the movement in both primary and secondary market yields for government securities,” Mustansir added. “Not so much due to the outlook for inflation, which is supply driven.”

Short-term secondary market yields are up 268 bps on an average above the current policy rate of 12.25 percent as per latest data. The same is up 200 bps since the last MPC meeting in April.

Similarly, cut-off yields in the last T-Bills auction recorded an average spread of 261 bps over the policy rate of 12.25 percent.

Market expectations reflect the fragile macroeconomic situation of the country, including pressure on the rupee amid a strengthening dollar and dwindling forex reserves, the report said. However, we rule out a massive hike (250 bps last time) as it may severely undermine growth.

Elsewhere, with the resumption of talks with the IMF as well as developments on the geo-political front, some form of relief can be expected from multilateral financiers including delay or staggered withdrawal of energy subsidies, helping contain inflation as well as improving investor confidence and supporting the rupee, Mustansir noted.

Pakistan Eurobond yield is increasing and now at 19 percent. At the end of the PTI government yield on bonds was 6 percent. Pakistani debt is now three times more expensive compared with the previous government and higher rates cast risk of default.