Pakistan rejected all bids in latest T-bills auction. Why did it?

Pakistan's central bank rejected all bids offered by investors in the latest treasury bills (T-bills) auction on Wednesday, despite some of them being on the lower side. This highlights something important — a paradigm shift that implies the government has been increasing its reliance on long-term borrowing instead of the short-term securities.

According to a government document, the fiscal deficit has been projected at PKR 8,500 billion for the current fiscal year, of which nearly 92% would be funded through domestic borrowing while 8% would be from external borrowing.

The government also plans to carry out zero net issuance through treasury bills in the remaining part of the current fiscal year. This means the central bank would only mop up enough funds to match the amount of debt maturing via T-bill auctions. However, since no bids were accepted in the latest auction, existing maturities of three-month, six-month, and 12-month treasury bills will be rolled over.

From October 2024 to June 2025, a total of PKR 12,341 billion is set to mature. Of this, 71% will mature in the second quarter of fiscal year 2024-25 (October to December 2024). In the third and fourth quarters of FY25, PKR 1,775 billion and PKR 1,747 billion will mature, respectively.

Around PKR 464 billion will mature for the three-month tenor, while the six-month tenor will see PKR 2,542 billion maturing during the remaining period of the current fiscal year. Meanwhile, PKR 9,335 billion is scheduled to mature under the 12-month tenor.

The Wednesday auction somewhat proved the government's stance of lowering its reliance on short-term papers and increasing it on long-term bonds, commonly known as Pakistan Investment Bonds having tenure of three-year, five-year, 10-years, and 20-years.

The amount about to be matured was PKR 113 billion. The State Bank of Pakistan had set a target of PKR 425 billion and it received bids in excess of three times or PKR 1,425 billion. If the SBP had mopped up the amount to the tune of PKR 1,380 billion, the cut-off yield would be lowered by 29 basis points to 17.48% for the three-month, 77bps to 17.74% for the six-month and 101bps to 17% for the 12-month T-bills.

The one-year tenor saw major participation with bids amounting to PKR 925 billion, representing 65% of the total bid amount. For the three-month and six-month tenors, the amount attracted was around PKR 222 billion and PKR 279 billion, respectively.

Market experts were of the opinion that in the upcoming Pakistan Investment Bonds auction, participation might be on the higher side while offers are expected to be lower compared to the previous cut-off yields. The yields were around 16.25% for three-year, 15.30% for five-year and 14.25% for 10-year bonds, with secondary yields quoted at 14.21%, 14.01% and 13.11%, respectively for all three tenors.

This indicates the cut-off yields on long-term securities would likely slide by nearly 150-200 bps.

All of this occurred to help the government lower its borrowing costs, while ensuring its debt profile shifts towards long-term government securities. Moreover, the drop will help trim National Savings profit rates. Though it is non-beneficial for the saver, it will provide a cushion to the government to lower the profit disbursements on these savings plans.

Domestic depositors have parked nearly PKR 2.27 trillion in regular income certificates, behbood, pension, shuhadda, defence and saving certificates.

The government document also showed the financing of federal fiscal deficit through domestic borrowing will be carried out through issuance of long-term government securities, i.e. Pakistan Investment Bonds and Government Ijara Sukuk.