T-bill yields fall as rate-cut optimism gains traction

KARACHI: Yields on Market Treasury Bills dropped on Wednesday, driven by growing market optimism that the State Bank of Pakistan’s (SBP), taking a hawkish monetary stance, will soon cut the interest rates as hopes are rife that runaway inflation is set to be “contained” down the line.

The cut-off yield on a three-month paper fell by 60 basis points (bps) to 21 percent. The yield on a six-month note also decreased by 29 bps to 21 percent. Similarly, the yield on a 12-month paper dropped by 31 bps to 20.1 percent. Through the auction of T-bills, the government raised Rs501 billion, exceeding its initial goal of Rs360 billion. “In anticipation of an interest rate cut as inflation has gone down and real interest rates have increased significantly,” said Samiullah Tariq, the head of research at Pak-Kuwait Investment Company, citing the decline in T-bill yields as the cause.

Pakistan anticipates May inflation to hover around 13.5 to 14.5 percent as a result of improvements in the country’s food supply chain and lower transportation expenses. Six successive weekly sensitive price index declines have accentuated already falling inflation with May consumer price index inflation set to fall to more than a 2-year low of 12.7 percent year-on-year, despite persisting overstatement of November 2023 natural gas tariff hike, said Optimus Research in a note.

“Even after building-in rebound in food prices and likely inflationary effects of the upcoming budget, we expect the headline inflation to stay relatively contained, averaging 13 percent in FY25,” it said.

After a contraction of 0.2 percent in FY23, GDP growth has posted a moderate recovery to 2.4 percent in FY24 helped by robust agriculture sector growth of 6.3 percent, while non-agriculture growth was timid at 1.2 percent, according to the report. “Sales of non-essential goods such as cement, steel, automobiles, electrical appliances, etc, remain at multi-year lows. Amid tight fiscal and monetary policies and weak investor sentiments, GDP growth is likely to remain in 2-3 percent band in FY25,” it said. It said the current macroeconomic indicators present a radically calmer situation when compared with the near meltdown scenario that played out in FY23.