Correction in PIB/T-bills Yield was obvious after the release of SBP Monetary Policy Statement suggesting that CPI has bottomed out.

However, a powerful statement was conveyed to market through MPS by the new team comprising of 9-members of Independent Monetary Policy Committee (MPC) empowered to take decision on all matters pertaining to monetary issues that has replaced previous Advisory Committee on Monetary Policy.

Recent surge in PIB/T-Bills yield in inter-Bank market was overdone, as market probably misunderstood the message and reacted in hurry. Though MPS opted for a stronger language conforming that inflation has bottomed out, but it never hinted change policy stance.

Prior to MPS, T-bills were hovering around 6.20 pct and 3, 5 and 10 year PIB yields was around 6.30 pct, 6.68 pct and 8 pct respectively. Suddenly market yield popped up by 30-40 basis point.

Since last week market was offering T/bills in medium to sizable lots 5-8 basis point above last cut off. But off loading of PIB’s by couple of banks in the absence of commercial demand gave market jitter that yield would further make sharp surge.

Another growing perception in the inter-bank market is that since Government Paper amounting to Rs 1.5 Trillion is maturing this year, hence, banks are now enjoying dictating terms.

This is why in today’s T-bills auction, bid pattern will suggest that banks teased MOF by offering amount in large lots at a very high yield hoping that they will succeed to invest at a very high yield.

SBP on behalf of MOF announced rejection of auction giving very clear message that nothing has changed. Inflation is picking up, but not at alarming pace.

Though oil prices is up and Ramzan is due in next 40 days, but I am very clear on inflation that it is likely to stay around 3 pct by end of June and between 3.5-3.75 by end of December 2016. So there is nothing to panic about.

My view on oil remains bearish and I do not see average oil prices surpassing USD 50 this years. I am rather waiting for Kuwaiti supply, which will soon flood the market with oil glut, as strike is over. Kuwait production was down by 1.7 million barrel, which will once again be producing at maximum around 3.15 million barrels per day by June and hence, I am not ruling out another sharp drop in oil prices.

Interestingly, today’s rejection of T-bills auction will give market a good lesson that it is not on the driving seat. All SBP has to do is keep market liquid, bond and t-bills will yields will make natural adjustment.

Market has to realize that Total size of Bank Holdings of Govt Securities is Rs 6.433 Trillion of which T-bills are Rs 2.614 Trillion and rest are PIB’s and Ijara Sukuk (GIS). Hence it’s not T/bills or Bond traders call as they are not on the driving seat. They are totally dependent on the Central Bank’s liquidity management policy, or else banks will have to make large corporate lending, which they won’t. Return on Govt Paper is still too attractive at current levels.

Cost factor is the major concern of SBP and MOF. One percentage point means Domestic Debt costing another three-quarter of a billion US Dollar or increase in debt by same amount.

While, I do not rule out further rate this year, which suits our economy, as inflation is no more a threat. Look at FED, despite decade old nearly zero interest rate policy it is still in no mood to hike rates because of fear of impact of rate hike that can cause damage to its economy. Similarly Japan have been struggling since more than a decade and now Europe too opted for same strategy/

Pakistan also cannot afford luxury of higher policy rate due to Revenue shortfall, declining trend in Exports and in anticipation of possible pressure from overseas Pakistani. Deficit Financing is a pain in a neck.

No pressure will be exerted on exchange rate. We have witnessed Pakistan’s interest rates dropping to almost half. Rupee remained stable for obvious reason as for carry trade purpose PKR is still too attractive due to favorable interest rate differential.

Tomorrow I am excepting sharp reversal of T/bills and PIB yields and I will not be surprised to see 10-year bond making sharp gains to break 8 pct yield in coming days/months