Customized Research

July 31, 2013

WHERE TO PARK YOUR MONEY?

Key Rates Rates on the rise: Why?
MONEY MARKET RATES Did you notice the mix trend cut offs have shown in the last few auctions?
Gove rnm e nt Se curitie s Wonder which maturity would be the safest bet at the moment?
Te nors Avg Yie lds
Overnight 8.51% All questions are answered here, but for that first lets have a look at the cut
1 w eek 8.56% off trend with an analytical eye. It is a preconceived notion that market
2 w eeks 8.59%
1 month 8.71%
expectations about the policy rate drive the cut off yields. True to some
2-months 8.79% extent! But the picture has another side to it as well. For example, the
3-months 8.84%
5-months
recent hike in the cut-off yield of three-month papers in auction held on 10th
8.90%
6-months 8.90% July 2013 was more to do with the fact that the settlement date delayed due
9-months 9.00%
to first of Ramadan was a holiday, consequently reducing tenure of paper
1 year 9.01%
from 84 to 83 days.
Source: JS Treasury
T Bill Rate s
On the other hand, government securities of relatively longer tenure
Cut offs 3-m onths 6-m onths 12-m onths including PIBs and T Bills (12 months) are showing upward trajectory too.
Current 8.96% 8.99% 8.98%
These rising yields indicate rising expectations in the bond market of a
Previous 8.97% 8.97% 8.98%
near-term increase in the policy rate, possibly of 50-100bp.
9.00% Current Previous
8.99% Discount rate to hike 50-100bps in…
8.98%
8.97%
The news that is making rounds is the expected hike in policy rate. But the
8.96% million dollar question is when is the reversal in rate expected?
8.95%
8.94% We base our expectation of rise in policy rate on the following factors:
3-mo nths 6-mo nths 12-months
Rising inflation due to sharp looming hike in power and gas tariffs,
Source: SBP
PIB Rate s Higher currency devaluation followed by continuous depleting foreign
Cut offs 3 Ye ar 5 Ye ar 10 Ye ar reserves,
Current 10.44% 10.90% 11.65%
Previous 9.69% 10.15% 11.05%
And most importantly, possible monetary tightening under the IMF
14.00%
program
Current Previous
12.00%
Apart from this, with monthly figures yet to be updated by SBP of Balance
10.00%
8.00% of Payment for 1MFY14, we cannot say if the conditions on the external
6.00% front are favorable or still deteriorating. In months to come, imported
4.00%
2.00%
inflation is also to keep a watch at. If international oil prices start rising,
0.00% which remained stable throughout FY13 around USD 108-109/bbl, we can
3 Year 5 Year 10 Year
expect serious threats to our import bills.
Source: SBP
Taking all above points into consideration, we believe that a rate hike may
JS BANK LIMITED NOT be a call for upcoming monetary policy. Likelihood of reversal in
Tre as ury Analys t: Sana Taw fik
October’s policy too seems bleak. Thus, investing in short tenures; in 3
Em ail: s ana.taw fik @js bl.com
UAN: +92-21-111-JSBank (572 265) Ext: 213 months T Bill to be precise, would be a prudent decision for now and a safe
bet.

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