The government of Pakistan raised a substantial Rs1.65 trillion through the auction of Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) on Tuesday, maintaining stable yields despite a significant interest rate cut by the State Bank of Pakistan (SBP) last week. This auction marks the first one after the monetary policy decision on December 16, which saw the interest rate slashed by 200 basis points (bps) from 15% to 13%.
Overview of the Auction Results
The auction results highlighted the resilience of the T-bill and PIB markets, despite expectations of a yield decline following the rate cut. Analysts had speculated that the T-bill yields would adjust downward, given the decrease in the policy rate, but the stability of these yields indicates that the market had already factored in the rate cut.
The government successfully raised Rs826.5 billion from T-bills, including Rs366.85 billion through three-month tenors at a cut-off yield of 11.99%, Rs200.9 billion through six-month tenors at 11.99%, and Rs258.7 billion through 12-month tenors at 12.29%. Additionally, the PIB auction raised Rs723 billion, with Rs716.5 billion allocated for ten-year bonds and Rs6.5 billion for five-year bonds.
Combined, the total raised through the auction reached Rs1.645 trillion, which was seen as a positive signal for the government’s debt management strategy.
Government’s Borrowing Preferences Shifting Toward Long-Term Debt
The auction results also reveal a shift in the government’s borrowing preferences, with a noticeable inclination towards long-term debt in the form of Pakistan Investment Bonds (PIBs). The total raised through PIBs surpassed expectations, with Rs732.5 billion collected from both competitive and non-competitive bids. This shift reflects the government’s strategy to lock in funds at relatively stable rates for longer durations, especially in light of ongoing economic uncertainty.
Despite the substantial amount raised through the PIB auction, the T-bill borrowing fell short of the target. The target for T-bill borrowing was set at Rs1.2 trillion, while the maturing amount was Rs1.565 trillion. However, the Rs913 billion raised through T-bills in this auction still reflects a considerable contribution to the overall sum raised.
The Impact of Interest Rate Cuts on T-bill and PIB Yields
Market analysts had initially anticipated a drop in T-bill yields following the SBP’s 200bps rate cut. However, the yields held steady, with the three-month and six-month T-bills yielding 11.99%, and the 12-month bills yielding slightly higher at 12.29%. The stability of these yields suggests that the market had already adjusted to the reduced policy rate.
Tahir Abbas, director of equity at Arif Habib Ltd, indicated that the reduction in the policy rate had already been absorbed by the market. “I expect another 100bps rate cut in the next monetary policy, and then a pause looks like a must,” he said. This implies that the monetary policy decisions have been relatively predictable for market participants, allowing them to adjust their expectations accordingly.
The State Bank’s Monetary Policy and Inflation Outlook
The SBP’s decision to cut interest rates by a cumulative 900bps within six months represents an aggressive easing of monetary policy aimed at stimulating economic activity. The rate cut from 22% to 13% in December marked the fifth consecutive reduction since June.
One of the main drivers behind this monetary easing has been the unexpected decline in Consumer Price Index (CPI) inflation. Experts are predicting that inflation could further decline, possibly reaching 4% in December. This forecast aligns with expectations of another 100bps cut in the upcoming monetary policy. However, Tahir Abbas warned that inflation could start rising again from May, potentially prompting the SBP to pause its rate cuts.
Risks of Core Inflation
Despite the positive trends in CPI inflation, the SBP has highlighted core inflation as a significant hurdle to achieving its inflation target. Core inflation remained above 9% in November, indicating that price pressures in certain sectors remain persistent. This could limit the central bank’s ability to continue cutting rates, as a sharp rise in inflation could reverse the positive trends seen in other areas.
Breakdown of Auction Results: T-bills and PIBs
The auction results provide detailed insights into the government’s borrowing strategy.
T-bill Auction
The government raised Rs826.5 billion through T-bills in the auction, distributed across different maturities:
- Three-month tenor: Rs366.85 billion at a cut-off yield of 11.99%
- Six-month tenor: Rs200.9 billion at a cut-off yield of 11.99%
- 12-month tenor: Rs258.7 billion at a cut-off yield of 12.29%
PIB Auction
The government raised Rs723 billion through the PIB auction, with the breakdown as follows:
- Ten-year bonds: Rs716.5 billion
- Five-year bonds: Rs6.5 billion
- Three-year bonds: No bids were accepted
Including non-competitive bids, the total raised through PIBs stood at Rs732.5 billion. Combined with T-bills, the total raised through the auction was Rs1.645 trillion, demonstrating the government’s ability to raise significant funds for fiscal needs.
Debt Management Strategy and Future Outlook
The government’s debt management strategy appears to be evolving, as evidenced by the preference for long-term borrowing through PIBs. This move is likely an effort to manage interest rate risk over the medium to long term, securing financing at relatively stable rates.
Although T-bill borrowing fell short of the target in this auction, the overall amount raised meets the government’s fiscal needs. The shift towards longer-tenure bonds may provide the government with greater flexibility in managing its debt portfolio, especially as the economic situation evolves.
The State Bank of Pakistan’s role in managing these debt instruments remains crucial, especially as it continues its efforts to stimulate economic growth while managing inflation. The SBP will likely continue to monitor inflation trends closely, making adjustments to its monetary policy as needed to ensure long-term economic stability.
Key Takeaways from the Auction Results
- The government raised Rs1.645 trillion through T-bills and PIBs, with a notable focus on long-term debt.
- T-bill yields held steady despite a significant interest rate cut, indicating that the market had already priced in the change.
- The State Bank’s aggressive interest rate cuts have been driven by a sharp decline in CPI inflation, with expectations of further easing.
- The government’s debt management strategy is shifting towards longer-tenure debt, providing flexibility for managing future fiscal needs.
FAQs
1. What is the significance of the Rs1.65 trillion raised in the T-bill auction?
The Rs1.65 trillion raised is a significant step in managing the government’s fiscal needs, providing funds for various public sector expenses while maintaining financial stability.
2. Why did T-bill yields remain stable despite the rate cut?
T-bill yields remained stable because the market had already absorbed the impact of the 200bps interest rate cut, meaning the lower rates had already been factored into the pricing of these instruments.
3. What is the government’s strategy regarding long-term debt?
The government is increasingly focusing on long-term debt, such as PIBs, to lock in financing at stable rates and manage interest rate risks over the medium to long term.
4. What impact did the interest rate cuts have on CPI inflation?
The interest rate cuts have been linked to a decline in CPI inflation, with experts forecasting further declines in inflation, potentially reaching 4% in December.
5. What is the outlook for future interest rate cuts?
Experts predict another 100bps rate cut in the next monetary policy, but after that, a pause may be necessary due to expected increases in inflation later in the year.
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