12-month T-bills slump to 14-month low

The rate of return on the 12-month T-bill in the secondary market slumped to a 14-month low, falling below 20% on Thursday in anticipation of a deeper cut in the central bank’s key policy rate (interest rate) in early June 2024.

The yield on the one-year T-bill reduced by up to 90 basis points or more in the secondary market following a similar situation seen in the paper auction held at the primary market on Wednesday. The yields in Wednesday’s auction—held after a two-week gap—dropped in anticipation of a significant slowdown in inflation reading to 13-13.5% in May 2024, compared to a two-year low at 17.1% in April and a multi-decade high at 38% in May 2023.

While speaking to The Express Tribune, Saad Hanif, Head of Research at Ismail Iqbal Securities, said discussions with treasury firms suggest that financial markets are expecting a 200 basis points cut in the policy rate to 20% in June 2024, compared to the record high 22% since June 2023.

He, however, disagreed over the abrupt change in sentiment in domestic debt markets, believing it would possibly be a token rate cut of 50-100 basis points instead of a deeper cut by the State Bank of Pakistan (SBP) on June 10, 2024. This is because the government would still be in the negotiation phase to secure the next International Monetary Fund (IMF) loan programme at the time of the interest rate revision, while inflation reading may increase again after new tax and austerity measures are announced in the budget for 2024-25 in the same month of June 2024.

CEO of Topline Securities, Muhammad Sohail, commented that investors are rushing to buy Pakistan’s 1-year T-bills following yesterday’s auction, “where a whopping 9 out of 10 investors missed out on securing the 1-year paper.”

As a result, the yield on 1-year T-bills has dipped below 20% (20.4% cut-off) for the first time in 14 months, signalling a significant shift in market sentiment. “With this development, the market is now anticipating a more substantial cut in interest rates, setting the stage for potential changes in monetary policy,” he added.

Maaz Azam, Head of Research at Optimus Capital Management, said the expected deep cut in the inflation rate to 13-13.5% in May would mount pressure on the central bank to cut its key policy rate to support industrial and economic activities.

The likely massive drop in the inflation rate would increase the real interest rate (policy rate minus inflation reading) to 8-9% in May 2024 from 4.7% in April 2024. This would allow the bank to cut the policy rate. “The drop in the inflation reading would make it tough for the central bank to justify the status quo in the interest rate in June,” he said.

However, Hanif added that the drop in the inflation reading is not the only target of the central bank this time. In addition to this, the bank would also take a deeper look at the availability of forex reserves when deciding the policy rate.

He argued that the cut in the interest rate would increase demand for dollars for imports, which may deplete the country’s foreign exchange reserve back to a critical level. Therefore, the situation does not allow the bank to make a deeper cut in the policy rate in June 2024. Besides, the six-month KIBOR—the interest rate at which banks lend money to each other—dropped by 55 basis points to 20.79% on Thursday.

The three-month and 12-month KIBOR reduced by 21 basis points and 55 basis points to 21.35% and 20.55%, respectively, on the day.

Published in The Express Tribune, May 17^th, 2024.

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