KARACHI, Oct 31: The cut-off yield on treasury bills was slashed up to 40 basis points in the second auction on Wednesday after the monetary policy.

Market experts said it was expected because government papers were already being traded in the secondary market at rates less than the rates set in the previous auction.

Rates of the treasury bills and Pakistan Investment Bonds were floating below auction rates in anticipation of a further cut in the interest rate in December.

The three-month treasury bills rate were cut to 9.23 per cent, a reduction of 40 basis points.

The six and 12-month t-bills rates were slashed by 37 and 36 basis points to 9.27 per cent and 9.5 per cent, respectively.

The government raised Rs291 billion through auction while banks offered a total amount of Rs465 billion.

The banks were running short of liquidity when State Bank injected Rs641 billion on Tuesday, enabling the banks to invest in government papers.

Experts said weak economic growth and declining inflation provided space for monetary expansion and this was the reason that State Bank reduced policy interest rate to 10 per cent in the first week of October.

However, market sentiments were even against this discount rate, and they saw further fall in the interest rate, possibly in December.

The sentiments were well reflected in the secondary market where government papers were traded at 20 to 25 basis points, below the official rates.

Analysts said market sentiments were considered in new t-bills rates which were slashed up to 40 basis points.

Last week, 12-month t-bills rate fell by 25 basis points in the secondary market as it was traded at a rate of 9.40 to 9.50 per cent.

The market witnessed 10 to 15 basis points fall in rates of 6-month t-bills while 3-month rates remained almost stable.

The short-term maturity papers were traded at a record low rate in the secondary market.

Last week short-term maturity papers were traded at 8 per cent which was recorded low in 10 years.

A senior banker said the biggest beneficiary is the government which sold papers at a lower rate. He said the government would borrow more, but pay less since rates have been falling. The governments borrowing through commercial banks has been increasing since last three years which has widely damaged banking services for growth of economy.