Treasury Yields Rise on Inflation Concerns

KARACHI: Treasury bill yields rose at an auction on Wednesday, in line with market expectations, in the first auction since the central bank increased its key haircut by 125 basis points (bps) to 15%, the highest since 2008, to combat soaring inflation.

The yield limit on three-year Treasury bills rose 52 basis points to 15.75%. The six-month paper yield rose 100 basis points to 15.80%. 12-month paper yields rose 99 basis points to 15.94%.

“In today’s treasury bill auction, a huge stake of Rs 1.57 trillion was seen with the government raising Rs 506 billion against the target of Rs 500 billion and a maturity of Rs 445 billion,” Topline Securities said in a note.

Analysts said rising prices in the country remained a major concern for investors.

Fahad Rauf, head of research at Ismail Iqbal Securities, said inflation and higher policy rates were already priced into Treasury yields even before the Monetary Policy Committee (MPC) meeting.

“The lack of forward-looking guidance [in the latest monetary policy statement] led to uncertainty around interest rate peaks,” Rauf added.

The SBP projects inflation in the range of 18-20% in this fiscal year before falling sharply in fiscal 2024. This baseline outlook is subject to high uncertainty, with risks stemming from developments world commodity prices, the stance of domestic fiscal policy and the exchange rate.

Domestically, as energy subsidies were rolled back, headline and core inflation rose significantly in June, reaching a 14-year high, the SBP said in a monetary policy statement released on last week. Consumer and business inflation expectations have also risen sharply. At the same time, the current account deficit unexpectedly widened in May and the trade deficit continued its widening trend after March to reach a 7-month high in June, thanks to the surge in imports from energy, he said.

“As a result, foreign exchange reserves and the rupee remained under pressure, further worsening the inflation outlook,” he added.

The Karachi six-month interbank offered rate (KIBOR), a benchmark rate for consumer and business lending, hit an all-time high following a sharp hike in the policy rate.

The six-month KIBOR rose 35 basis points to 15.87%. The rising cost of borrowing is not a good sign for credit growth to the private sector. Expensive loans are expected to dampen demand for bank loans from large and small businesses as well as consumers.

The government borrows aggressively through treasury bill auctions, so it sells the bonds and bills at higher yields. The reason is that its financing needs are growing. And its funding avenues are limited due to the lack of foreign aid amid a delay in reviving the IMF lending program.

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