KARACHI (October 02 2003): The State Bank of Pakistan on Wednesday foiled the attempt by banks to raise the yield on treasury bills by rejecting all bids for one year paper since the bids were way above the rates on which these bonds were being traded by the banks among themselves.
As a consequence, only bids of Rs 1.5 billion for 3 months were accepted against an auction target of Rs 15 billion.
Majority of the money market players, when reached for their views, appeared quite baffled and preferred to remain non-committal until the 10-year bond auction result to find a clue.
Meanwhile, 10-year bond shed 15 basis points to trade at 5.90. It closed at 5.92/97, while demand for one year T-bill saw it trading at 1.85-2.00 from its earlier rate at 2.15-2.25.
SBP officials were perturbed at the bids received in Wednesday's auction. Three months paper was being traded at 1.50 percent, while offers in the auction were made at 1.78 percent.
Therefore, SBP only accepted bids at 1.50 percent. In case of one year T-bills the lowest bid was 2.27 percent and the highest 2.75 percent, while banks were trading these instruments among themselves at 2.20 percent.
SBP rejected all the offers leaving the market overflowing with liquidity.
SBP had targeted an auction amount of Rs 15 billion with maturity of Rs 12 billion accruing on Wednesday.
Later in the day, SBP announced a special OMO auction, to be held on Thursday, for one and two weeks T-bills to stabilise the system.
The SBP decision had an immediate impact on the 10-year PIB being traded in the secondary market, with rates taking a dip from 6.05 to 5.90 percent.
SBP's action ultimately provided the much needed guideline to the confused and directionless inter-bank market by scrapping one-year Treasury bill rupee auction.
By accepting a token amount of Rs 1.5 billion in 3 months at 1.5082 percent it raised 12 basis points.
The SBP has clearly given signal that it will not take long strides by raising rupee rates sharply, experts said.
A treasury manager of a foreign bank who has other ideas, turned bullish on rates.
He believes that government borrowing is necessary to meet the debt payments.
His logic is that funding of interest payments of $ 4.2 billion requires large rupee borrowings.
Asad Rizvi of Currency Market Associates (CMKA) however, says, “The current move by the SBP is quite a professional approach and an indication to the aggressive market players having bullish view on rates that it will not spoil all its hard work done during the year.”
“What is the purpose of easing rates when the impact of its earlier effort has started showing signs of economic gains? He asked. In theory the positive sign of a rate cut is not visible until after a period of 18 to 24 months.”
He continued, “The priority is to create jobs by increasing the economic activity and when the consumer activity has started to pick up, with inflation already below 3.5 percent and with a GDP growth target of over 5 percent, we do not see a major rate hike during the fourth quarter of 2003.
Liquidity would continue to flow in the market and Rs 50 billion jumbo bonds will not have any major impact on the rates. CMKA, believes that the flow of remittances will increase in the coming months due to Ramazan and Eid, which will add liquidity in the market. Every month the inter-bank market receives Rs 15 to Rs 20 billion against the overseas remittance, where would this money be utilised?”
“Banks have to realise that the SBP monitors country's overall financial system and it is also responsible for the country's monetary policy. Stock market reacted sharply losing over 10 percent of its value in a short span of time on fear of rate hike.
This is one small reaction. We are at a very crucial stage and any drastic change of our interest rate policy will further damage the stock market, which may result in plenty of casualties. Banks with small size of capital will be hardest hit if such a move occurred.
CMKA, believes that the climb in 10-year bond price was an speculative move.
The market probably misread the finance minister's statement, when he was quoted as saying that the jumbo bond was to drain the liquidity. He never said that rupee rates would rise.
The SBP's first signal came during the week when it announced that it was holding the export finance rates at 1.5 percent but market failed to read the lips.
The 10-year Jumbo bond auction of October 4 will provide a benchmark for the next two auctions. Scrapping of one-year T-Bill auction will force the corporate sector to rethink their future strategy.
Bidding between 5.90 percent to 6.20 percent looks good enough for serious bidders to meet their requirements, so the range between 6.20-50 percent is worth taking a chance.
So despite quarter end tax payment market would be long between Rs 35 million to Rs 40 million and if the targeted amount was picked up the market would still be long by Rs 10 billion.