Factor Affecting Yields for Treasury Bills In Pakistan?

Abstract

Treasury bills are the financial tool that is used by the government for two purposes such as for controlling money supply in the economy and to keep the inflation rate low. The pricing of these financial tools depend upon the market forces of demand and supply. In Pakistan T-bills are issued by the State Bank of Pakistan with the maturity of three, six months and also for one year. The return on bills depends upon the maturity duration of the securities. Different macroeconomic factors can influence the yield on securities. Many statistically researches had been done in this context but little work has been done in Pakistan’s context. The study is conducted to check that how macroeconomic variables affect the yield of Treasury Bills. Other than the factor of maturity many other factors influence the rate of return. Most important macroeconomic variables that influence the yield are stock prices, prime lending rate, CPI and the supply of money. In this paper, the data is collected from State bank quarterly and annually reports, IMF, Karachi stock exchange and World Bank database. Normality of the data autocorrelation, multicollinearity and Heteroskedasticity were tested, that shows that data is stationary, data has no autocorrelation, data is not Heteroskedasticity. Data is taken from 1991-2015 while prime lending rate is of six months. Risk-Averse Preferred Habitat Model taking term premium as explained variable given by (Heuson, 1988). Results show that the overall model is significant. Individual significance of the variables shows that only one variable CPI is significant that shows that when inflation increases it increases the yield of T-bills. It is because of when rate of inflation increases the rate of interest in the economy is low and people prefer liquidity or holding cash.