In a special treasury bill (T-bill) auction on January 3, the State Bank of Pakistan (SBP) was able to raise Rs 655.09 billion against a target of Rs 300 billion. The complete amount of the T-bill issuance was concentrated in a three-month tenure. The yield cut off stood at 16.999%, marking no change from the previous auction which happened a week ago.
Tenders for sale of three-month, six-month and 12-month government of Pakistan T-bills were invited by SBP through primary dealers on January 3, with settlement date on January 4. The bids for the shortest term bill exceeded Rs 730 billion, with a bid yield of as much as 18%. As per the auction results published by the SBP, it has maintained the yield cut off rate at 16.999%, raising 655 billion in short-term debt. Subsequently, all the bids for the six-month, and 12-month T-bills were rejected.
The competitive auctions were recorded at a face value of Rs 652.03 billion, while the non-competitive ones stood at Rs 3.06 billion. Because of the special nature of this auction, both the competitive and the non-competitive bids were auctioned at the same time.
Why is this T-bill auction special?
Typically, the auctions of T-bills are conducted fortnightly (on Wednesdays). The auction and settlement dates, target amount and maturity amount are issued through pre-announced auction calendars. The auction calendar of every quarter is published at the start of that quarter.
However, after the last auction of Q4’22, the SBP scheduled a new auction within six days of the previous one. The auction will reportedly serve the purpose of meeting the government’s mid-year revenue shortfall of Rs 225 billion.
Additionally, “there was excess liquidity available in the market and the government took advantage of that. This would also ease pressure on the government in the coming t-bill auctions,” said Fahad Rauf, the head of equity research at Ismail Iqbal Securities
It is the federal government’s prerogative to hold as many auctions as they want, while staying within the legal framework. However, an unsolicited auction shows a sense of urgency, implying that the government is raising money to pay off older debts nearing maturity, and to meet other expenses.
How do T-bill auctions work?
T-bills are short-term government securities that are issued by the government of Pakistan and distributed in the primary and secondary markets by the SBP. These highly liquid government securities have sovereign guarantees and a fixed rate of return, which is referred to as a yield. T-bills are a tool for raising short-term cash by governments.
Banks are allowed to hold this security in an Investor Portfolio of Securities (IPS) accounts for their customers. Investors can buy these securities in a competitive auction in the secondary market, or a non-competitive auction in the primary market.
On the day of the auction, primary dealers (banks and brokerage houses) offer bids for T-bills with a certain yield. This yield is determined by policy rates, market sentiment and future expectations. A certain cut-off for yield is announced that renders all the bids below that rate as accepted. The dealer pays the SBP a discounted amount for the bill, which is returned in full at maturity factoring in the yield of the T-bills.
