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Cut-off yield for six-month treasury bills may drop by 100 basis points

KARACHI (February 03 2003) : The cut-off yield for the six-month treasury bills is expected to register a decline of as much as 100 basis points in the auction due this week because of high liquidity at the interbank market.

On January 8, the State Bank sold six-month treasury bills worth Rs 33.164 billion and the cut-off yield fell to 3.95 percent from 4.45 percent of Dec 11, 2002.

According to a leading dealer at the money market, the six-month treasury bill has been trading between 2.70 percent to 2.85 percent.

Hence, the expected decline in the next auction on February 4 might see a cut of nearly 100 basis points.

Treasury bill auctions are watched as an indication of State Bank's stance on its lending rate to commercial banks.

Interest rates in Pakistan have been slipping with each day gone by, especially, since the September 11, 2001 events.

There is no doubt that Pakistan's economy has been a beneficiary of the September 11 events, more significantly the external side of the economy, ie the balance of payments situation has been buoyant after Pakistan's decision to join the US-led coalition.

In the light of current economic fundamentals, ie bulging rupee liquidity and record low inflation levels, coupled with global expectations of declining or stable interest rates, analysts believe that interest rates in Pakistan are likely to remain on the lower side in the medium term.

An abnormal increase in foreign reserves of the country (that have jumped to $9.5 billion) and lower inflation (3.55 percent in Jul-Dec 2002) has created an over-liquidity crisis in the interbank market these days.

Treasuries and government and corporate bond prices have been rising upward for the last one-year; 10-year government bonds and benchmark 6-month T-Bills are currently yielding 5.15 percent and 2.85 percent, respectively.

The market is continuously witnessing maturities of NSS, T-bills, and FIBs while some on the cards seem as if the rupee liquidity just would not go away.

The interbank market expects inflows of around Rs 50-60 billion from maturing T-bills this month, while NSS maturities are being speculated to be in the range of Rs 70-80 billion, in the absence of any official data.

A Reuters survey of global bond strategists showed that the US Federal Reserve would keep the Fed rate at the current 40-year low level of 1.25 percent until June 2003.

This is basically to provide the much-needed boost to the confidence sapped by fears of an Iraq war and declining stock prices.

A few who participated in the survey believe that the conditions point to a further interest rate cut, rather than an increase.

''With a strengthening Pak rupee amid abnormal inflows, interest rates in Pakistan have to keep pace with the global trend,'' an analyst said.

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