KARACHI: The Treasury bill auction on Wednesday attracted massive bids of about Rs1.65 trillion but the auction result showed government borrowing less than the targeted amount.

The auction reflected both government’s need for and banking sector’s willingness to park maximum liquidity in the risk-free high yielding papers.

However, the government only raised Rs467.4 billion through the auction, much lower than investors’ expectations while the amount was even lower than the auction target of Rs600bn.

The auction once again indicated that the interest rates are likely to remain unchanged as investors felt no hesitation to invest maximum sums in 12-month papers instead of short-term three-month instruments.

The government also preferred to raise money from 12-month papers picking up Rs350bn, however the cut-off yields for these papers witnessed significant drop as compared to other papers. The cut-off yield on 12-months papers declined by 31 basis points to 13.93 per cent compared to 14.24pc in the previous auction held on Aug 28.

Moreover, cut-off yields on three- and six-month papers dropped by 1bps while the government raised Rs52.35bn and Rs65.07bn for the two tenures respectively.

The bid patterns showed investors were eager to park their liquidity in one-year papers, which attracted bids worth Rs1.455tr, over 88pc of the total bids available for the auction.

The government is bound to meet its liquidity needs through banks and corporate investors particularly after the State Bank stopped lending funds to the government.

The government had set Rs600bn target for the auction while the maturity amount was just Rs27.4bn that means the government was willing to raise additional Rs572.6bn. However, the government raised additional Rs440bn through the t-bills.

The bid pattern published by the State Bank of Pakistan also showed private sector’s increasing appetite for government papers. In the previous auction, the total bids amounted to Rs953.4bn, which jumped to Rs1.65tr in the latest auction. The government had raised Rs755.5bn in the previous auction.

The huge flow of banking liquidity towards government papers has badly damaged the private sector credit off-take. In the first two months of the current fiscal year, the private sector kept retiring debts instead of increasing net borrowing.

Published in Dawn, September 12th, 2019