Pakistan Money Market Review

Updated on July 14, 2001

The money market remained flooded with liquidity with activity ranging from overnight to two months well within single digits. The overnight market, unchanged from that of last week, was in the narrow band of 1.00% and 3.00% while the one and two week tenors also traded at the lower end of the spectrum of 3.50% and 5.00%. It seemed that the market would certainly turn around due to the T-Bill auction but that was not the case to be. Rates fell off sharply on news of the State Bank accepting Rs. 6.50 billion, an amount six times that of the pre-auction target, but was by far less than the liquidity estimated in the system.

The past week trading was conducted in all tenors across the board. Borrowers took the opportunity to cover themselves over June 30th, while nominal activity was also reported for six month in order to keep themselves comfortable over the year end. One and two months also fell to 10.25% and 10.75% respectively. However, it was after the auction that one and two month rates slid further with two month activity at 9.50%, a level at which trades were last experienced around the end of January 2001. Simultaneously three month activity was witnessed in between 10.80% and 11.10% while four month trades were also reported at close to 11.10%. An interesting scenario emerged after the T-Bill auction's total acceptance of Rs. 6.50 billion at cut-off levels of 12.15% and 12.60% for the three and six month papers, respectively. Buyers having picked up the six month paper from the auction, managed to make hefty capital against by selling on the Thursday not even holding the paper for a single day. The 12/7/01 six month paper was offloaded at levels of 11.60% i.e. 100 basis points lower than the cut-off of 12.60%. Secondary market buyers for this paper were certainly very aggressive in picking this paper from the primary dealers. However, rumours in the market for a possible discount rate cut in the days to come could have actually compelled buyers to find this paper worth buying at such levels. Trading for this paper was also the reason that caused the six month repo offer to fall to 11.40% temporarily but only nominal amounts were reported to have been picked at this mark, which we feel the borrowers might later regret.

The IMF finally agreed to provide the US$131 million tranche for the current quarter. This was expected by the market participants ever since the rupee was allowed to fall and the interest rates were raised rather aggressively in the last T-Bill auction of the last quarter i.e. on the 28th of June. Words for the need of a genuinely market based exchange rate policy that needs to be followed by Pakistan were also heard amid the release of the $131 million. While the wait is still on for the Letter of Intent that the GoP will release in the days to come, we feel that as far as interest rates are concerned nominal downward adjustments can certainly not be ruled out in the next auction at the end of the month.

YIELD PROFILE
FEDERAL INVESTMENT BONDS
.	THIS WEEK	1 WEEK AGO	1 YEAR AGO
1 Year	12.65	13.00	07.75%
2 Year	13.00	13.50	08.50%
3 Year	13.40	14.00	09.00%
4 Year	13.60	14.25	09.25%
5 Year	13.90	14.50	09.50%
10 Year	14.50	15.00	10.00%

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AUCTIONS
BID DATE	INSTRUMENT		RESULT		SETTLEMENT
July 11	T-BILL		July 11		July 12
TARGET AMOUNT		BID AMOUNT		ACCEPTED AMOUNT
Rs.1,000 Mln		Rs.25,500 Mln		Rs.6,500 Mln

MATURITIES INSTRUMENT DATE AMOUNT T-Bill 26 July 2,669 Mln

REPO RATES   THIS WEEK 1 WEEK AGO 1 YEAR AGO Overnight 04.25 03.50 02.00 1 Week 04.25 05.50 06.50 1 Month 08.70 10.25 07.00 3 Month 10.70 11.25 06.95 6 Month 11.40 12.20 07.15 1 Year 12.25 12.60 N.A

TREASURY BILL RATES MATURING THIS WEEK 1 WEEK AGO 1 YEAR AGO 1 Month 09.70 11.25 07.60 2 Month 10.25 10.90 07.30 3 Month 10.80 11.35 07.15 4 Month 11.10 11.70 07.15 5 Month 11.40 12.10 07.20