Abstract
Treasury bills are financial tools to maintain and control liquidity in economies. Liquidity has implications on
business activities and therefore has considerable importance for economic growth. Pricing of financial
tools adjust to demand and supply forces. The macroeconomic landscape of Pakistan largely depends on
interventions made by the State Bank of Pakistan through its monetary policy. Treasury bills are assumed to
perform a dual role of maintaining liquidity while keeping inflation low. The yields on securities primarily
depends on the terms of maturity however there could be many other factors that affect the yields of
treasury bills in Pakistan. There is little empirical research available that empirically measures the effects of
all underlying factors on the yields of treasury bills in the native economy. Term of maturity is an important
consideration when it comes to determining the yields on securities. Yields on Treasury Bills in Pakistan may
involve other factors apart from term premiums. Term premiums have been studied by notable researchers
around the world using sets of macroeconomic factors as independent variables. This paper considers
macroeconomic factors more relevant to the Pakistani context that play towards shaping the bid and offer
rates of Treasury Bills locally. This paper adopts the Risk-Averse Preferred Habitat Model suggested by
(Heuson, 1988) by taking term premiums as explained variable. The set of macroeconomic factors include
un-expected changes in stock prices, money supply, consumer price index, and the prime rate. The paper
uses a theoretical framework and builds testable hypotheses. Data is taken from State Bank of Pakistan,
International Monetary Fund, World Bank, and Karachi Stock Exchange. Formal diagnosis of Durbin-Watson
Statistic and Variance Inflation Factors is carried out for checking typical regression problems. Included data
does not suffer from serious autocorrelation and multicollinearity and therefore regression estimates could
be trusted more. Prime rate (KIBOR) is found to be the most significant determinant of yields on T bills
whereas other modeled variables are insignificant though mostly they show expected signs for their
coefficients
