The State Bank of Pakistan (SBP) on June 29, conducted a Market Treasury Bill (MTB) auction to raise debt for the federal government. The government was able to raise Rs1.74 trillion from primary dealers through the auction conducted through the sale of 3, 6, and 12 month government security papers.
What’s interesting about this auction is that the government set out with a target of Rs800 billion. However, it managed to raise Rs1.742 trillion against the target.
The primary dealers, in this case the domestic banking system participated enthusiastically, placing buts of Rs2.37 trillion cumulatively.
However, significant participation remained in the 3-month tenor MTBs, with bids of Rs1.9 trillion. The government accepted bids of Rs1.7 trillion. Due to the heavy participation, the cut off yield managed to decrease by 2 basis points (bps) to 15.23 percent compared to the previous auction.
176 bids in total were made in the 3- month MTB, the lowest being 14.5449 percent, and the highest bid being 16.49 percent.
The government borrowed Rs 15 million through 6-month MTBs. Bids of a total Rs 279 billion were made. The cut off yield went down by 15 bps to 14.80 percent. 38 bids were made in the 6- month tenor, the lowest bid being 14.8001 percent, and the highest being 16.7400%.
Rs 4.5 billion was raised against the sale of 12- month MTBs. 35 bids were placed totaling Rs 190 billion. The lowest bid was at 14.9499 percent, the highest at 17.4999 percent. The cut off yield for the 12-month tenor remained unchanged compared to the previous auction at 14.9499%.
Calling in the mother of all OMOs – a 77 day injection
On June 24, the SBP announced a 77-day Open Market Operation (OMO) injection into the interbank. This is the longest OMO injection made by the SBP. Previously, the longest OMO tenor was 63 days. Rs402 billion was injected through this OMO expected to mature on September 9, 2022.
This signifies that the monetary policy rate is likely to remain unchanged till the OMO matures in September.
The SBP has already locked-in 94% of outstanding OMOs worth Rs4.1 trillion in 63 day tenors. In the past, OMOs by nature were usually of shorter tenors. The SBP has been locking in longer tenor OMOs in order to calm the markets and provide practical forward guidance.
Following the OMO injection, the secondary market yields dropped by around 15-20 bps.
It was expected that this OMO injection would bring down the yields further in the MTB as the market would believe there is no imminent rate hike.
“The OMO funds are for a short period, so it only makes sense to lock-in shorter tenors,” says Fahad Rauf, Head of Research at Ismail Iqbal Securities.
He adds, “The Government pretty much swept everything available on the table for 3M tenor. Against a target of PKR800bn, Govt raised 1.7tr, effectively picking up high yield bids as well. Secondly, there was a news flow on the day of the auction that the IMF requires further monetary tightening, which made investors a bit cautious.”
Rauf calls the 6-month and 12-month “irrelevant for this auction.”
The next monetary policy committee meeting is expected to be on July 7, 2022. “There general consensus is that interest rates would stay the same. But no one wants to bet on it and are maintaining a cushion to absorb the impact in case SBP hikes rates. At 15.25% market has incorporated another 100 bps increase.” Says Rauf.
However, it is interesting to note that the policy rate could also be hiked despite an OMO. Rauf explains, “If there is 100 bps hike (despite the 77 day OMO injection), the market would not react. Moreover, everyone knows this will likely be a final adjustment, agreed with IMF.”
