Banks'' expectations are also reflected in the widening yield spreads in the secondary market between the 3-month and 12-month, as well as the yield spread between the 3-month and 6-month. Although, the report said that the overall fiscal deficit was higher in Q1FY19 compared to the same quarter last year, its funding was skewed heavily towards non-bank domestic resources as well as external funding. Banking system had financed 92.6 percent of fiscal deficit in Q1FY18, but in Q1FY19, its contribution in the same was only 17.1 percent.
Owing to expected hike in interest rate, the participation of the banks remained muted in most T-bill auctions during the quarter. The only two auctions where an active participation of banks could be seen were those held right after the July rate hike. In these two auctions, banks placed cumulative offers of Rs 4.4 trillion all in 3 months paper against the maturities of Rs 2.0 trillion.
As a result, the government was able to meet its pre-auction targets.
Fixed coupon Pakistan Investment Bonds (PIBs) also demonstrated a similar trend where one out of three auctions was scrapped during the period under review. Moreover, the gross acceptances amounted to Rs 19.4 billion compared to maturities of Rs 461.1 billion.
In contrast, floating rate PIBs remained the most favored instrument in the longer tenor bonds as the offered amount marginally exceeded the target compared to fixed rates where banks offered less than half of the target amount during Q1FY19.