T-bill yields surge as rate cut hopes fade

KARACHI: The three-month treasury bill yield jumped more than one percentage point on Wednesday as investors scaled back expectations of an early interest rate cut by the central bank amid amid rising inflation and an IMF review.

The cut-off yield on the three-month T-bill was 126 basis points (bps) higher at 20.6998 percent. The six-month yield ended at 20.3952 percent, unchanged from the previous auction. The yield on the 12-month paper increased by 25 bps to 20.3290 percent.

Through the sale of T-bills, the government raised Rs361 billion, a little more than its original target of Rs300 billion. “The yield in the 3-M tenor experienced the most significant increase compared to other tenors, reflecting the market's potential anticipation of a delay in the interest rate reversal cycle in the near term,” said Tahir Abbas, the head of research at Arif Habib Limited.

“This anticipation of a probable deferment of an interest rates cut is driven by persistent inflationary pressures and the upcoming last review of the SBA [stand-by arrangement] with the IMF, scheduled for March 2024,” Abbas added.

The shorter tenor paper saw the largest participation of Rs649 billion, exceeding the 12-month paper for the first time in four months, according to the auction result. The total participation was Rs1.29 trillion.

The T-bill auction bid pattern suggested that investors were demanding more return than compared to the previous auction due to higher inflation expectations and political uncertainty, said Awais Ashraf, director of research at Akseer Research.

“The investors increased demand for returns indicates a status quo expectation in the upcoming monetary policy,” he added. The SBP will hold its next monetary policy meeting on March 18.

“We expect the first rate cut of 100 basis points in September 2024, followed by a 200 basis point cut in November 2024." However, some analysts see a first-rate cut in April.

The State Bank of Pakistan maintained the policy rate at 22 percent in January due to the slowing down of the pace of decline in inflation anticipated earlier amid adjustments in administered energy prices.

Pakistan's consumer price index (CPI) inflation clocked in at 28.34 percent in January, compared with 29.66 percent in the previous month. This was due to an increase in food prices and electricity charges.

Analysts expect the CPI inflation in February to remain on the higher side in a range of 24-25 percent due to an increase in local fuel prices, a rise in monthly electricity fuel charge adjustment, and an increase in gas prices.

However, they expect a major decline in inflation from March onwards, with the full-year average inflation for FY24 to remain at 25 percent, compared with the SBP’s inflation target of 23-25 percent.