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T-bill Auction

T-bill auction T-bill auction Economy SBP Pakistan PIB Auction PIB Auction PIB T-Bills

42 replies to this topic

#1
Amin Khan

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    T-bill yields to fall; owing to balance liquidity…

    The T-bill auction is due on June 15th, 2011 with a settlement date of June 16th, 2011. We believe that T-bill yields may fall marginally by 6, 5 and 6 basis points (bps) in 3M, 6M and 12M tenors to 13.47%, 13.71% and 13.85%, respectively. Following the trend, we anticipate the participation to remain skewed in the 6M T-bills.
    We believe that a considerable weight to finance the fiscal deficit on domestic sources will exert pressure on the yields going forward. However we expect the State Bank of Pakistan (SBP) to keep the market liquidity in check hence a further scenario of rate hike can possibly be ruled out.

    T-Bill yields in all tenors to fall by 6, 5 and 6 bps…
    Against the previous auction, where we witnessed a sharp rise in T-Bill yields by 32, 16 and 7 bps in 3M, 6M and 12M, respectively. However this time, with a pre-auction target set at PKR 150bn against maturities of PKR 168bn, we believe the yields to stay comfortably flat. We expect the yield for 3M and 12M to fall by 6bps respectively and 6M to dip by 5bps. This is owing to relatively increased liquidity in the market; where overnight rates have fallen to 12.35% against 13% at the time of previous auction. Further as per news, a payment of PKR 30-35bn in resolution for circular debt has been injected, which kept the market liquidity in balance. In addition to this, with the end of fiscal year coming, market is expected to remain relatively liquid as the government is expected to make payments towards wheat imports and debt servicing. This improved liquidity helped PKR to remain stable against the greenback over the month of Jun’11; showing an appreciation of 0.24%.

    In long-run, fiscal prudency would be key in determining the yield curve…
    The government has planned to finance PKR 716bn (84% of the total budget deficit) through mobilizing domestic sources. This heavy reliance is likely to put considerable pressure on the yields going forward. For instance the government has set to raise PKR 413bn through non-banking sources where almost 20% or PKR 82bn has been so far targeted through T-Bill. This target may seem too low when compared to other heads. Looking at FY11, the government raised almost thrice the amount it actually budgeted through T-Bills. Hence, going forward with other sources drying up the need to finance the deficit will eventually fall on to T-Bills.

    Will this push the discount rate further up…?
    The possibility of that seems very bleak. If the SBP maintains its pro growth stature then raising the discount rate seems unlikely. We expect the SBP to continue injecting liquidity in the market. In addition to this, with CPI inflation projected to taper off at 12%YoY in FY12 against 14.5-15%YoY in FY11E; this may further advocate towards a lowering discount rate. We expect that to come in play from 2QFY12; as high base effect on CPI inflation kicks in. Further to this the FBR tax collection for 1st and 2QFY12 will be watched closely as it would be critical in determining the fiscal soundness of the government.
    (AH)

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    T-bill auction - yields to be down but sticky

    Our stance on today’s T-bill auction alongside an outlook on secondary market interest rates with initial impressions on the upcoming MPS.

    The money market theme these days
    After making new highs, T-bills and PIBs' yields have been appearing to be once again on the decline as the latest secondary market pattern reveals. The State Bank of Pakistan (SBP)'s effort, on behalf of the gov't, is commendable that has been trying to keep the money market liquid enough to keep a balance between secondary market yields and funding for the ever-ballooning fiscal deficit, more through secondary channels.
    The secondary market yields are expected to settle on the lower side even with today’s and the upcoming PIB auction on 22nd, for two major reasons: 1) central bank has been enduring to keep cost of debt servicing lower for the gov't by keeping the market liquid through frequent OMOs. This should lead to gradual fall in secondary market yields so that the gov't stays glued more to the banking and non-bank channels for borrowing to fund its fiscal deficit than to the central bank channel, and 2) few major banks are believed to have greater than conventional level of liquidity today owing to recent maturities, which may lead to slight decline in yields in today’s auction.

    Budget FY12 marks more reliance on local sources to fund the deficit
    The gov’t, in its budget FY12 planned to fund the deficit through domestic channels i.e. 84% or Rs715bn while remaining through external source. This is going to clearly keep the secondary market yields downward sticky in FY12 as the gov’t plans to raise over Rs400bn through non-banking sources (mostly through T-bills and PIBs).

    Yields to shed 4-8bps today, while yields stay downward sticky ahead
    The total target for today’s T-bill auction is Rs150bn while the total maturity (including that of OMOs) is slightly over Rs160bn. Thus, market yields are expected to come down albeit with marginal numbers ranging from 4-8bps in 3M, 6M and 12M paper, respectively. Secondary market yields were initially expected to gradually come down in the medium term, primarily because of the liquidity factor while market had also built up some confidence and a relatively clearer view of what may come next in the monetary policy statement, provided the gov't relied more on non-central bank borrowing. However, notwithstanding the latest money supply numbers issued by the SBP paint the opposite picture, as gov’t borrowing from the SBP now stood at 18% above the level of Jun-10 while it supposed to be leveled to zero by quarter end. However, recent trend indicates that better foreign flows have also enabled the gov’t to manage its funding more appropriately, shifting the burden to schedule banks eventually. Given the prevailing scenario, SBP is likely to maintain a balance between an already low GDP growth and high gov’t borrowing and thereby keeping market liquid, secondary market rates lower and discount rate intact.
    (InvstCAp)
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    #2
    Amin Khan

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    T-bill Auction

    T-bill Auction – steeper yield curve
    The government raised PKR 180.358bn in yesterday’s auction against a target of PKR 150bn. Participation during the last auction (PKR 139.788bn) was much lower than the target of PKR 175bn due to tight market conditions, but participation has rebounded this time around. Total participation remained healthy at PKR 232.615bn with offers for 6mo and 12mo T-bill overshadowing participation in the 3mo T-bill. Cut off rates for the 3mo and 6mo tenure edged down by 4.6bps and 2.3bps respectively while the yield for the 12mo T-bill has remained unchanged.

    Bid pattern signals stable interest rates
    Participation trend during FY11 had been heavily skewed towards 3mo T-bill – average of 65% during Jul-Jan11 - in anticipation of rising interest rates. Recall that SBP has increased the discount rate by 50bps during Jul11, Sep11 and Nov11. However, recent participation trends indicate that the market expects interest rates to remain stable in the medium term as participation in the 6mo T-bill has ranged between 49-73% in the six auctions held during 4Q FY11.
    (GLOBAL)

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    #3
    Amin Khan

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    Changing sentiment on money market?

    In yesterday's T-bill auction (first post the FY12 Budget announcement), cutoff yields on 3M and 6M bills ended up marginally lower while yield on 12M bills remained unchanged at 13.91%. However, cutoff yields are still sharply higher than the CYTD lows recorded in the May 4'11 auction and there appears to be an emergent shift back into 3M bills. With the FY12 fiscal deficit target of 4% of GDP appearing optimistic coupled with opaqueness on external funding, it appears that the GoP will likely remain heavily reliant on the domestic money market with deficit monetization remaining a tangible risk. We believe these dynamics have been factored in over the Jun'11 auctions with a more hawkish view being adopted by money market participants. In our view, while expected downtrend in inflation (average CPI expected at 12.5% in FY12 vs. ~14% in FY11) may provide room for Discount Rate cuts across FY12, these are likely to be limited considering persistent fiscal slippages and nascent risks to the external account.
    (AKD)
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    #4
    Amin Khan

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    T-bill: easy sell or easy buy
    June 17, 2011

    Nothing could be easier than selling treasury bills in a country that lacks investment avenues and where risk free securities yield a double-digit rate of return.

    For a cash-starved government, the above mentioned scenario definitely provides a good borrowing alternative. But, in such cases, investors, who are cognizant of the fact that the government is in dire straits usually play a hard bargain to demand lucrative returns.

    The treasury bill auction held two days went swimmingly well, as the submitted bids totaled Rs233 billion, or nearly 1.5 times of the pre-auction target amount of Rs150 billion.

    In keeping with a high participation level, the government exceeded its borrowing requirement by accepting a total of Rs180 billion worth of bids, which is also higher than the total of Rs124 billion worth of bills that matured yesterday.

    The market relates aggressive selling to the governments high level of a borrowing requirement at the end of each fiscal year. Similarly, this might also reflect the governments progress to pare down its borrowing from the central bank.

    Since investors are expecting the interest rate to remain stable in the near future, the benchmark paper stole the spotlight by attracting nearly half of the participation level.

    The bidding pattern clearly suggests that the savvy investors tried hard to keep the yield constant at currently high levels. The lowest bids placed on the 3-month, 6-month, and 12-month paper were nearly 18 basis points (bps), 2 bps and 5 bps, respectively, higher than the lowest bids placed in the previous t-bill auction held earlier this month.

    Therefore, the cut-off yield on the 12-month paper remained unchanged at around 13.9 percent, while it modestly fell by 5 bps and 2 bps on 3-month paper and 6-month paper, respectively. However, the new cut-off yields are still above the May-17 level.

    The market had earlier forecast a greater drop in the cut-off yields, which had steeply increased on account of a lower participation level in the auction held at the start of June 2011.

    In line with the participation pattern, the benchmark paper accounted for nearly half of the accepted amount, and money market dealers believe that investors will continue to accumulate 6-month paper as long as there is indecision about the future direction of interest rate.

    The investors will see one more t-bill auction before the end of the current fiscal year, at which the market expects the governments borrowing requirement to again outstrip the pre-auction target level of around Rs50 billion.
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    #5
    Amin Khan

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    FY11 – Auctions help de-monetize debt

    In the recent T-bill auction, the govt. managed to raise PR72.8bn vs. target of PR50bn at the same cut-off rates as last auction aided by healthy participation.

    FY11 saw two major developments in T-bill auctions: (1) heavy participation in 3M T-bill during July-Jan gradually shifted to 6M T-bill post Jan-11 reflecting near-term expectations of status quo; and (2) cut-off yields increased by 147-157bps in line with the DR hike, with the yield curve flattening out.

    Post-Nov10, any WoW increase of >PR50bn in borrowing from SBP has largely been offset in the following week via T-bill and/or PIB/Sukuk Auctions. This reflects govt’s strategy to offload its deficit financing burden to banking sector.

    Looking ahead, any concrete news flow on receipts from coalition support fund, ADB, and IDB will be the key to setting next year’s auction targets which are yet to be announced.
    (KASB)
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    #6
    Amin Khan

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    Economy: Increase in Cut-off Rates Seems Inevitable
    • SBP is scheduled to conduct T-bill auction today with a borrowing target of PKR90bn against maturities of PKR61bn
    • Given the tight liquidity situation in the system and high borrowing requirements to fund fiscal spending, increase in cut-off rates seems inevitable albeit meager
    • We expect cut-off rates to be raised by 4bps for 3M and 6M tenors while a mere 1bp increase is expected in 12M paper
    • Increasing stiffness in Pakistan-US ties (resulting in suspension of approx USD300mn on account of coalition support fund) and GoP’s inability to inculcate fiscal balance may also increase risk on potential flows from International Financial Institutions
    • Real interest rates are expected to remain positive which would help SBP maintain status quo on the monetary side
    • Given that interest rate risk is not perceived to be any greater than it presently is, participation in 6M papers are expected to remain high. This situation is also to the benefit of the government where rollover yields might not affect the government over 1HFY12

    (BMA)

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