Yesterday’s MTB auction received no bids for 12month T-Bills from Financial Institutions who seem to be reluctant to invest in bills exceeding 6-month period as they expect an increase in interest rates in one of the upcoming two policy statements.
The Central Bank released Bid Pattern for MTB auction. The Pre-auction target was Rs.650 Billion against a maturing amount of Rs.614.715 Billion. The SBP received bids of Rs.1,003.7483 billion mostly concentrated in the 3M issue with very few bids for the 6 months and no bid against the 12 months bills.
Summary of Auction Bids
# of Bids
% of Bids
* Amount in Rs. Millions.
State Bank of Pakistan sold T-bills worth Rs. 697 billion. Cut-off yields remained unchanged. No bids were received for the 12 months T-bills. Of the total amount, 617.449 billion was issued for the 3-month tenure, whereas 79.74 billion for the 6 month issue.
Result of T-Bill Auction (Amount in PKR Million)
No bid received
A case for rising Interest Rates
A closer look at PIB Auction history during the last two years reveals a slow yet sure shift in bond market trading. State Bank since Jan 28th, 2015 has accepted no bids for its 20 year PIB Targets. According to State Bank data, SBP has held a total of 31 auctions for PIBs since January, 2015 receiving only 3 bids which were subsequently rejected. The reason for this outright neglect of 20Y PIB by bidders is beginning to suggest a potential increase in interest rates.
The total amount received during the PIB auction held on 18th of October, 2017 amounted to Rs. 25 billion, out of which 3 years PIBs received most bids clocking in at Rs. 22 billion, 5 years PIB received a meagre amount of Rs. 1.5 billion and 10 years PIB received Rs. 1.6 billion.
The lack of participation in the 20 year Pakistan Investment Bonds since January 2015 have suggested an unwillingness from financial institutions to invest long-term in government securities. The results have gone to show these participants have no interest in investing in the said instruments at the prevailing yields.
In the instruments invested, yields for ready 3 year PIB (12-2016 to 12-2019) hovered around 6.65%, yield for 3 year remaining bond (03-2015 to 03-2020) witnessed no change going from 6.70% on 2nd October 2017 to 6.69% in month ended October 2017.
PIBs of longer tenors such as 5 year (4-2016 to 4-2021), 6 year (7-2012 to 7- 2022), and 10 year (4-2016 to 4-2026) also showed stagnation, with their yields prevailing at 7.20%, 7.60%, and 8.00% respectively.
On the other hand, results of the Monthly T-bill Auction gave away another hint at the changing monetary outlook of Pakistan’s economy. With target for auction amounting to a total Rs. 650 billion, against which a total of Rs. 715 billion was accepted. The majority share of Rs. 715 billion was accepted in 3 months tenure receiving a total bids worth of Rs. 924.008 billion. The 3 month bids were followed by 6 months receiving bids worth Rs. 79.74 billion and 12 months receiving no bids at all. The lack of interest in 12 month MTB’s also goes on to show Financial Institutions’ reluctance to invest in longer term instruments.
Looking at the ongoing scenario and uncertainty, bond yields will remain stable in the near future.
With rising inflation, in lieu of the increasing fuel prices across the world, Pakistan may soon see a rise in interest rates. The country suffers from a debt problem throughout its history. With bank’s unwillingness to lend at low rates for a longer period of time (even for 1 year T-bill), it is highly probable to mention that the State Bank seeks to raise interest rates during the current fiscal year.
World Bank in its Pakistan Development update released today forecasts inflation to rise gradually; 6% in FY18 and 7% in FY19.