KARACHI: The government reduced the cut-off yields by up to 15 basis points and raised Rs708 billion through the auction of treasury bills (T-bills) on Wednesday.

The bids pattern shows that investors are also keen on investing in the short-term T-bills. The government raised the highest amount of Rs347.4bn for benchmark six-month T-bills.

Market experts believe that the government has been raising money from the domestic market for a short tenure. They think the government is discouraging investors from opting for the long-term Pakistan Investment Bonds (PIBs), which offer higher returns of up to 10.9pc for 10-year bond, and had already resulted in piling up of huge domestic debts.

The first quarterly report of the State Bank of Pakistan revealed that debt servicing for the entire FY20 was Rs2,387bn. The steep rise in interest payments consumed over 73 per cent of the Federal Board of Revenue taxes and constituted nearly 53.8pc of total federal expenditures.

The three-month T-bills cut-off yield was 7.4pc compared to 7.47pc in the previous auction — a cut of 7bps. The government raised Rs242.7bn against the bids of Rs545.4bn.

However, the investors offered Rs1,026.6bn for six-months T-bills and the government raised Rs347.4bn at the rate of 7.68pc — a decline of 15 basis points in the rate compared to previous auction.

In addition to non-competitive bids, the government raised R80.99bn for three month and Rs37.4bn for six months — total amount raised was Rs118.3bn for non-competitive bids. The entire amount raised through the auction of T-bills was Rs708.32bn. Total bids for the T-bills were Rs1.7 trillion.

Financial market experts see a change in the interest rate in the coming months after successful negotiations with the International Monetary Fund while banks are also willing to see an increase in the interest rate as they have been using their maximum liquidity to invest in risk-free government papers.

The investors offered total Rs16.5bn for two and three-year PIBs. However, the government rejected all bids for three-year bills while it raised Rs8.5bn for two years against the bids of Rs13.5bn.

The government also raised Rs3.59bn as non-competitive bids which collectively increased the amount raised through PIBs to Rs12.09bn.

While the government has been discouraging domestic investors for long-term PIBs, it encourages foreign investors to invest in these and has been able to attract about $240 million. Analysts said foreign investors of PIBs were getting significantly high returns without risk. The interest rate has remained unchanged for more than nine months at 7pc which provides stability for both domestic and foreign investors. The interest rates on T-bills are slightly higher than the 7pc policy rate but the PIBs offer much higher returns. However, bankers said the real interest rate after deducting inflation is still negative which means there is need to increase the interest rate, particularly if the interest rate is higher than 8pc.

Published in Dawn, April 22nd, 2021