Cut-off Yield on T-Bills Soars Up To 229 BPS

Cut-off yields on the first auction of market treasury bills (T-Bills) have soared by 229 basis points as a result of the State Bank of Pakistan’s recent monetary policy decision for an interest hike.

On Thursday, the Central Bank announced that the government has raised Rs. 504.33 billion through a T-bills auction, compared to a target of Rs. 740 billion. It was learned that non-competitive auctions were used to raise another Rs. 22.5 billion.

The SBP increased the cut-off yield for three-month T-bills by 229 basis points to 10.79 percent. For this programme, the government raised Rs. 338.33 billion. The rate on six-month T-bills was boosted to 11.5 percent, through which the government raised Rs. 110.9 billion. The cut-off yield for 12-month notes was raised to 11.51 percent, and Rs. 55 billion was added to the budget.

The dramatic leap in cut-off yields of 229 basis points was expected by market players as the central bank had already raised its policy rate by 150 basis points to 8.75 percent, which surprised the market at first, but the double-digit (11.5%) increase in CPI-based inflation for November justified the Bank’s decision.

Historically, the rate of the benchmark six-month treasury bills has witnessed an increase of up to 397 basis points this fiscal year, from 7.53 percent on July 14 to 11.50 percent on Wednesday. Similarly, during the current fiscal year, the rate on three-month T-bills was boosted by 354 basis points to 10.79 percent.

Overall, cut-off yields on all government bonds have observed a significant increase in the past 18 months. After the COVID-19 emergency in March 2020, the SBP dropped the interest rate from 13.25 percent to 7 percent in three months and kept it there for nearly a year to sustain the economy, in addition to injecting significant liquidity to accomplish growth.

However, a few market players are of the view that the decision has resulted in rising inflation as the amount of money in circulation currently exceeds 25 percent of the overall supply.

Amid rising inflationary pressures, market experts predict another interest rate hike on 14 December when the next meeting of the Monetary Policy Committee is scheduled to convene.