January 2010 - MCB-Arif Habib Savings and Investments Limited

Treasury Market ReviewA relatively stronger broad money (M2) growth of 5.4% (Jul-Jan 16, FY10) inJanuary 2010 as against the previous month improved the liquidity situationresulting in a small decline the benchmark KIBOR and treasury yields of alltenures. The growth in M2 was due to the buildup of Net Foreign Assets (NFAs)of the banking system and higher private credit off-take following the seasonallending. In addition to this, the Central Bank also kept the market liquid byconducting Open Market Operations (OMOs) and injecting on a net basisRs.93.9bn, Rs.111.2bn, Rs.106.5bn and Rs.94.0bn in the first, second, third andfourth week of January respectively.The 6-month KIBOR declined steadily throughout the month by a total of 20bpsand is now currently at 12.23%. The easing-off of treasury rates was moreprevalent in shorter tenures. In the two T-bill auction targets, conducted duringthe month, maximum participation was seen in the 6-month tenure where yieldsdeclined by a total of 22bps. The decline in other tenures was in the range of 15-21bps. Risk averseness in general on the part of institutions in the backdrop ofslow economic activity continues to fuel demand for government securitiesparticularly in short tenures and is often seen supporting downward pressure onyields in the T-bill auctions. Interest in treasury bonds was also seen in theprevious month with the benchmark ten year PIB yields steadily declining by15bps through the month. Following the November Monetary policy statement,the 10-year bond started to edge upwards due to a revival of inflationaryexpectations. However along the backdrop of secular declining trend in inflation,market participants saw the 10-year PIB trading in the yield range of 12.70-12.80% (Dec, 09) as a good investment opportunity thus exerting downwardpressure on the yields.The maintenance of the discount rate at 12.50% by SBP was largely expected bythe market. As highlighted by the central bank, inflationary pressures are likely todominate the next couple of months ahead. There may however be room toreduce the discount rate by 50bps in the March provided inflation begins to easeby then, the Current Account Deficit continues to remain subdued and particularlyso if pledged funds at the FoDP forum arrive and boost domestic liquidity.Nonetheless, higher inflationary expectations in the immediate term may slightlysteepen the yield curve. It would thus not be unusual to see the 10-year PIBtrade again in the 12.70-12.80% yield range in February. On the other hand,short term rates may continue to remain subdued in the backdrop of ampledemand in the market.1