Pakistan’s first treasury bill auction following the State Bank of Pakistan’s unexpected decision to keep the policy rate unchanged has resulted in a sharp increase in yields, signaling a shift in market expectations and borrowing costs. The government raised Rs823 billion in the auction, while cut-off yields climbed by as much as 39 basis points, moving closer to the central bank’s policy rate of 10.50%.
The auction outcome comes shortly after the SBP’s monetary policy announcement on January 26, which surprised sections of the market that had anticipated a cut in interest rates. Prior to the announcement, treasury bill returns had slipped into single-digit territory, fueling expectations that easing inflationary pressures could lead to a reduction in the benchmark rate. The decision to hold rates steady has now prompted a repricing across short-term government securities.
Bankers and market participants noted that the unchanged policy rate has altered investor sentiment, particularly among foreign investors. Despite ongoing risks, some foreign investors continue to seek higher-yielding bonds, viewing elevated returns on government securities as an opportunity. However, this interest remains cautious and selective, influenced by broader macroeconomic and geopolitical considerations.
The rise in yields is expected to make treasury bills more attractive to both local and foreign investors. During the current fiscal year, there has been some observable foreign interest in domestic bonds, although inflows remain limited. Analysts point out that geopolitical instability continues to be a major constraint on stronger foreign participation, reflecting a broader trend seen in the decline of foreign direct investment into the country.
Auction data showed that the sharpest increase in yields was recorded for 12-month treasury bills, with rates rising by 39 basis points to reach 10.39%. Six-month papers also saw a significant jump of 38 basis points, taking yields to 10.32%. The government raised Rs315 billion through this tenor, highlighting sustained demand despite higher borrowing costs. Meanwhile, yields on three-month and one-month treasury bills increased by 30 basis points each, settling at 10.19%.
The auction attracted total bids worth Rs2.354 trillion, indicating strong market participation. Out of this amount, the government accepted Rs823 billion, including Rs318 billion raised through the non-bidding procedure. The auction target was set at Rs650 billion, while the maturity amount stood at Rs697 billion, suggesting that the government borrowed above its initial target amid favorable demand conditions.
While higher yields may help attract investment into government securities, financial experts have cautioned about the broader fiscal implications. Rising treasury bill rates translate directly into higher borrowing costs for the government, adding pressure to an already strained fiscal position. Interest payments are projected to reach Rs8 trillion in fiscal year 2026, making them the single largest component of the federal budget.
Economists warn that the increasing debt servicing burden could limit fiscal flexibility and crowd out development spending. As the government relies heavily on short-term domestic borrowing to meet its financing needs, sustained high yields may exacerbate debt sustainability challenges unless accompanied by stronger revenue growth and fiscal consolidation measures.
The latest treasury bill auction underscores the delicate balance facing policymakers as they navigate inflation control, investor confidence, and fiscal sustainability. With yields now hovering close to the policy rate, future borrowing costs will remain sensitive to monetary policy signals, inflation trends, and external developments. Market participants are expected to closely watch upcoming SBP decisions for further clarity on the direction of interest rates and their impact on Pakistan’s debt dynamics and investment flows.
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