Cut off yields at T-Bills auction spike as policy rate up

  • Benchmark lending rate hikes to 16-month high

Cut-off yields on Treasury Bills (T-Bills) spiked by up to 49 basis points (bps) in the auction held on Wednesday. It is the first increase of this magnitude during the last 15 months. Most of the bids received by State Bank of Pakistan (SBP) were for three-month tenor.

The auction target was Rs800 billion, total bid received amounted to Rs1.171 trillion, but the central bank accepted bid worth Rs731 billion.

The increase in cut-off yields was warmly welcomed mainly be the banks evident from the amount offered to buy the papers. Bids of Rs842.3 billion were offered for three-month T-Bills, the highest for any tenor from three to 12-month. The short-term investment also reflected that investors were expecting further increase in SBP policy rate in the coming months.

The SBP on Sept 20 raised its policy rate by 25 bps to 7.25% after 15 months and hinted that the rate could be increased with a slow pace if required, meaning there will be no major jump in the interest rate in the coming months.

Due to Covid-19 the central bank slashed the interest rate in mid-March to June 2020 to 7%, from 13.25%. The drastic cut was introduced to provide cheaper money to the economy in order to protect it from a serious negative impact which had turned into a global phenomenon.

While increase the interest rate, the SBP said that the time has come to protect the economy from overheating.

The adverse impact of interest rate hike became evident was in the latest auction of treasury bills.

The SBP increased the yield on six-month papers by 49bps and raised Rs41.1 billion against the total bids of Rs231.1 billion. The target was Rs200 billion for the tenor.

However, the government rejected all bids for 12-month papers for which the auction target was Rs300 billion. The bids received were Rs97.5bn.

The government also raised Rs72.8 billion through auction of Pakistan Investment Bonds (PIBs), which was almost half of the Rs150 billion target set in the auction calendar.

An amount of Rs3 billion was raised for two-year bonds against the bids of Rs6.25 billion, while Rs72.05 billion was raised for three-year against the bids of Rs110.55 billion. The SBBP also raised Rs871 million through non-competitive bids.

Analyst said the increase in T-bills rates would help to attract foreign investors who are interested to get higher return but were reluctant after regime change in Afghanistan. They said the fall of Kabul had negative impact as it created uncertainty in Pakistan also. They said this was the reason for higher outflow of foreign investment in equities from Pakistan, which also damaged the exchange.

It is feared that until a government is settled in Kabul with peaceful administration, the element of uncertainty would prevail over in Pakistan particularly on economic front.

According to a report by Topline Securities, KIBOR, which is a benchmark lending rate used in Pakistan, has surged by 76bps to 8.11% as per the latest reported number on Bloomberg today in 2021 to date.

Since the MPS announcement on 20th of this month, 6-month KIBOR is up 36bps to 8.11%. The 6-month KIBOR has now reached its 16-month high as these levels were seen on May 20, 2020 when Policy Rate was quoted at 8%.

Similarly, secondary market Treasury bond rates (PKRV) including 6-month T-Bill rate and 3-year Pakistan Investment Bonds (PIBs) have also surged by 80bps and 119bps in 2021 to date to 7.98% and 9.46%, respectively. T-Bill yield is also up 36bps since the MPS announcement.

Brokerage house believes that the recent surge in KIBOR and secondary market bond yields reflect heightened concerns over external account outlook and expectations of further increase in Policy Rate.

It believe that hike in interest rate will have positive impact on Banks, whereas leverage companies and sectors like Cements, Steels, OMC could face negative impact due to higher finance costs.

The impact will be somewhat mitigated by concessionary lending schemes like TERF and LTFF. However, it would still have an impact on cost of financing of companies as major portion of borrowing for these companies is still driven by KIBOR led lending.

Cash rich sectors which include E&Ps, Fertilizer and Autos will likely benefit from hike in interest rate, but higher rates may impact the sales outlook of sectors like Autos, Consumers and others.

The brokerage house believes that the impact of surge in KIBOR and PKRV rates would be more profound on Banks than generally believed by the market. This is because minimum profit rate on saving and term deposits is linked with Policy Rate which will be increased by 25bps compared to KIBOR and PKRV rates that have increased to a larger extent.

The minimum profit rate on saving and term deposits is 50bps below the SBP repo rate. Hence, minimum profit rate on saving and term deposits will be increased by 25bps to 5.75% as revised repo rate stands at 6.25% after SBP MPS.

Brokerage house eyes a 6% earnings impact on Banks.

Similarly, sectors like Cements, Steels and OMC are likely to be impacted by rise in finance costs by around 1% to 3%.

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