KARACHI - The 10-year based cut-off yield of Pakistan Investment Bond (PIB) has increased by 10 bps to 12.54 per cent from the last rate of 12.44 per cent, SBP said on Wednesday. The Ministry of Finance held PIB auction the other day and realized a total amount of Rs 10.11 billion for the all PIB tenures against the total target of Rs 10 billion. According to PIBs result, cut-off yield for 3-year maturity up by 4bps to 12.00 per cent, 5-year increased by 1bps to 12.407 per cent, 7-year rose by 7bps to 12.500 per cent, 15-year swelled by 2bps to 13.099 per cent, 20-year declined by 11bps to 13.5507 per cent and 30-year PIB cut-off yield turned down by 19bps respectively with total realized amount of Rs3.20, Rs1.38, Rs 0.15, Rs4.56 billions and Rs0.51, Rs 0.52, and Rs0.54 million in the recent PIBs auction. Auction of Pakistan Investment Bonds for 3, 5, 7, 10, 15, 20 and 30 years maturity was held on Wednesday with coupon rates as 11.25 per cent, 11.50 per cent, 11.75 per cent, 12.00 per cent, 12.50 per cent, 13.00 per cent and 13.75 per cent for 3, 5, 7, 10, 15, 20 and 30 years maturity respectively and settlement date of February 04, 2010. 10-year PIB cut-off in the last PIB auction was declined by 6bps to 12.44%. However, the downward move of the secondary market yields was short lived as the yields for all tenors increased in Dec-09, which was primarily backed by two major reasons, 1) Delayed IMF tranche for USD1.2bn, received late in Dec-09. This factor raised concerns over the domestic liquidity which is still heavily dependent on external financing. 2) Higher inflation expectations for Dec-09 which remained at 10.52 per cent YoY compared to the market consensus forecast of 11.8 per cent YoY. Soon after the materialization of loans and lower inflation the yields have normalized post Dec-09. Expectations for the upcoming inflation data are set at higher side which is supported by 4 per cent MoM and 18.4 per cent YoY increase in SPI as on 28 Jan-10. Another factor which is expected to impact the interest rate structure is the maintained monetary policy and recent fluctuations in the aggregate monetary supply situation. Although the SBPs expectations for higher NFAs and SBP reserves for 2HFY10 seem positive, the current money supply data for 23 Jan-10 shows divergent movement. The debt payment for USD600mn has impacted the NFAs while higher government borrowing requirement are once again reflected through borrowing from SBP which has started escalating soon after the quarterly review. The higher NFAs have lent support for growth in money aggregate which has posted 6.5 per cent growth in Dec-09. However, as per recent updates, it contracted again and reached 4.92 per cent still way short of the FY10 target of 14.5 per cent. Meanwhile SBP in its recent monetary policy statement pointed out that the main reasons for the strained market liquidity conditions in Q2-FY10 was decline in the NFA of the banking system and substantial improvement in private sector credit. The NFA of the banking system in Q1-FY10 had increased by Rs34 billion (excluding special SDR allocation) mainly due to budgetary support of $745 million (approximately Rs62 billion) from the IMF. In Q2-FY10, however, relatively lower budgetary support of $374 million (around Rs31 billion) and other foreign inflows resulted in a net contraction of Rs30 billion in foreign assets. On the other hand, in line with the modest recovery in real activity, private sector credit increased by Rs199 billion in Q2-FY10 compared to a contraction of Rs75 billion in Q1-FY10, adding pressure on available market liquidity. To some extent, market liquidity conditions in Q2-FY10 were helped by a significant increase in total banking system deposits. However, public sectors borrowings from the banking system continued to constrict liquidity in the system, not least because of government borrowings through T-bills to meet its budgetary requirements. Less than expected retirement of commodity financing and continued borrowings by the Public Sector Enterprises (PSEs) also strained market liquidity. Given these trends in private and public sector credit, together with a PIB auction target of Rs30 billion, market liquidity conditions are likely to remain relatively tight in the remaining part of the fiscal year. Thus, retirement of commodity financing, complete resolution of circular debt, and realization of projected foreign inflows will play a crucial role in improving market liquidity conditions.