Updated on Nov 10, 2001

The money market continued to pass through the liquidity crunch that has been prevailing since the end of October. There was no intervention by the State Bank the past week in the form of an OMO injection and overnight rates remained at the sky high level of 9.90%. This week the coupon rates on Pakistan Investment Bonds were finally cut with the announcement of auction for the three and five year papers. This caused the term market to react with brisk trading being reported in the three and six month tenors as well as outright trades for Treasury Bills.

Overnight rates remained glued at the 9.90% level with occasional dips to 9.25% and 9.50%. The tightness that could have compelled the State Bank to inject towards the end of the week caused one and two rates to slip off slightly but SBP stayed away. Activity in one and two week was conducted at lows of 8.50% and 8.75%. Banks had to approach the State Bank for respite on a daily basis and a maximum discounting of Rs. 10.20 billion on Thursday. The one month rate hardly moved from the 8.00% level and nominal activity was conducted at this level. The cut in the coupon rates on the three, five and ten year PIBs were announced on Tuesday. This adjustment in the coupon rates on PIBs has been done for the second time since these long term bonds were introduced last December. The rates on the three, five and ten year paper now stand at 10.50%, 11.00%, and 12.00%, resulting in a 130, 120 and 100 basis points cut. Simultaneously SBP also announced a pre-auction target of Rs. 5 billion for the three and five year paper auction settling on the 21st. The first impact of this news was three month repos were witnessed at levels close to 8.00%, traded from the middle of November. Besides brisk activity in the term repo and call market, the six month and one year 1/11/01 T-bill was traded at levels of 8.20% and 8.75%. Amounts were thin as sellers were quick to lower their offers and preferred to wait to book further capital gains on these papers that SBP had sold at yields of 8.50% and 9.10% in the 1/11/01 auction.

This flattening of the yield curve for long term clearly reflects that expectations of another SBP discount rate cut are looming in the market. Market players are expecting a cut of 100 basis points but we feel that at this point in time a 50 b.p.s should suffice for a much needed stimulus to the economy badly hit by the ongoing global recession and the crisis after the 11th of September.

YIELD PROFILE
FEDERAL INVESTMENT BONDS
.	THIS WEEK	1 WEEK AGO	1 YEAR AGO
1 Year	08.75	09.00	12.10%
2 Year	09.50	09.90	12.75%
3 Year	10.75	10.50	13.25%
4 Year	11.00	11.00	13.50%
5 Year	11.50	11.50	14.00%
10 Year	12.50	12.50	14.75%

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AUCTIONS
BID DATE	INSTRUMENT		RESULT		SETTLEMENT
Oct 31	T-BILL		Oct 31		Nov 01
TARGET AMOUNT		BID AMOUNT		ACCEPTED AMOUNT
Rs 17,650 Mln		Rs. 23,250 Mln		Rs.9,900 Mln

MATURITIES INSTRUMENT DATE AMOUNT T-Bill 01 Nov 17,650 Mln T-Bill 15 Nov 14,850 Mln T-Bill 29 Nov 18,047 Mln

REPO RATES   THIS WEEK 1 WEEK AGO 1 YEAR AGO Overnight 09.90 09.25 12.95 1 Week 08.70 08.13 12.95 1 Month 07.90 07.88 12.55 3 Month 07.90 07.88 12.05 6 Month 08.15 08.20 12.00 1 Year 08.50 08.58 12.10

TREASURY BILL RATES MATURING THIS WEEK 1 WEEK AGO 1 YEAR AGO 1 Month 08.40 08.60 13.55 2 Month 08.10 08.15 12.65 3 Month 07.90 08.10 12.35 4 Month 08.00 08.20 12.30 5 Month 08.10 08.25 12.20