It just seems too hard to believe that the government is straightening up! An analysis of bid rejection in the latest auction may appear redundant to the observer considering the miniscule (Rs700 million) additional requirement, it nevertheless sends a strong signal; the government chose to retire its debt rather than rolling it over! Moreover, it also represents a one-off for the financial system which during the previous and ongoing financial year has been participating with up to three times the auction target. However, in this particular instance (Dec-15), the amount offered stood at Rs42.6 billion whereas the target stood at Rs100 billion. Strain in the liquidity available within the financial system is evident through the rising KIBOR, currently at 11.98 per cent up from 11.90 per cent beginning of Nov-11. However, SBP chose to mop up liquidity (Rs22.5 billion) in the latest OMO conducted on Dec-14, running counter to the liquidity stress argument as a mop-up makes sense only if there is excess.
And most probably there is! The government has been exceeding its borrowing limit, Rs1,150 billion from the SBP since Oct-11. As of 2nd Dec, the government borrowing stock stood at Rs1,257 billion which implies that Rs107 billion have been printed in excess till the said date. Thus, one explanation of the strained liquidity can be that the excess money printed for catering to the government has not found its way back into the financial system.
A second and much spicier argument can be collusive behaviour amongst treasuries at banks. The much lower than target offer may have been placed to obtain absolute acceptance at higher rates in comparison to the last auction held a fortnight ago. The cut-off rates in the last auction (30th Nov) stood at 11.78 per cent, 11.81 per cent and 11.88 per cent of 3-month, 6-month and 12-month Bills respectively. However, the latest bid pattern shows that the range of yields for stood between 11.78-11.90 per cent, 11.85-11.92 per cent and 11.95-11.99 per cent for 3m, 6m and 12m T-Bills respectively, with higher denominations offered towards the higher end of these ranges across the board. And thus the wrath of the sovereign was ignited resulting in the rejection of all. This may mark a watershed in the relationship between the government and primary dealers which were previously very happily engaged through the alignment of their interests because there was oh so much risk in the economy. And most likely, the government has acquired a stronger bargaining hand because of the turn of its tax collection fate which has kept the deficit at about 1.1 per cent of the GDP during the previous quarter.
Historically, if one were to scrutinise the last three years, the government has only partially rejected bids ie (i) of 3m and 6m Bills in July and August 2009, which occurred on the eve of a discount rate cut, and, (ii) of 12m bills in Sep and Oct-10, and in Jan-11 along the same lines. This instance may also be indicative of a similar direction, although hindering factors such as over borrowing from the SBP may play strong. But regardless of whether all goes well or unwell, the government can be sure to have its way by hook or by crook.
If there was any trust in the government or its good intentions, then hopeful conjectures could have been made about the government wanting to change its debt profile in favour of permanent debt or long-term bonds/PIBs developing deeper precedents for the corporate bond market considering a PIB auction is expected soon. But only if there was!
The T-bill rejection
