Rate of return on treasury bills rises

Banks make most investment in short-term papers.

KARACHI: The State Bank of Pakistan (SBP) increased the rate of return on the benchmark six-month market treasury bills to 13.39 per cent in an auction on Wednesday. In the previous auction held on November 15, the rate was 13.2 per cent.

The rise in the rate of return was expected following an increase in discount rate by the central bank in its monetary policy announcement at the start of the week. The discount rate was jacked up by 50 basis points to 14 per cent on the premise of unchecked government borrowing and high inflationary pressures.

In the current fiscal year that started in July, the government has so far borrowed Rs266 billion from SBP, sparking fears of inflation. In the July-October period, inflation stood at 14 per cent and the State Bank expected it to remain in double digits during much of the year ending June 2011.

In the auction for three, six and 12-month treasury bills, the State Bank accepted bids worth a total of Rs117.19 billion against the target of Rs110 billion. For six-month bills, the bank accepted offers worth Rs48.81 billion.

In three-month papers too, banks made a heavy investment of Rs63.28 billion. Yields on the paper also rose to 13.16 per cent compared with 12.85 per cent in the previous auction.

However, in 12-month bills, banks showed comparatively less interest injecting Rs5.1 billion into the paper. Yield on the one-year bill also advanced to 13.67 per cent against 13.3 per cent.

Commenting on the auction, BMA Capital Head of Equity Research Hamad Aslam said the rate of return on treasury bills depended more on the liquidity position in the inter-bank market than on the discount rate.

“For the last one to two weeks, liquidity was short in the market due to mop-up operations by the central bank to absorb excess money and that caused an increase in yields on the bills,” he said.

Earlier, during the last two to three months there was enough liquidity in the market because of healthy inflows of net foreign assets in the country. Elaborating, Aslam said remittances from overseas Pakistanis soared 13 per cent to $3.5 billion in July-October this year, while the current account deficit improved greatly by more than 50 per cent to $533 million in the same four-month period.

Besides, foreign investors made a net buying of $39 million worth of shares in the domestic bourse and there were some inflows of foreign assistance as well.

“Banks made most of the investment in three and six-month treasury bills, which shows they did not want to block their money for a longer period and expected an increase in the yields in future auctions,” Aslam said.

Published in The Express Tribune, December 2^nd, 2010.