Foreigners support rally on Egyptian treasuries, pushing yields lower
Foreign investors supported a rally on the Egyptian debt market, pushing the yields on the three-month and nine-month treasury bills lower on Sunday.
Egypt used to attract significant inflows, around $11 billion, into government bonds and bills before the 2011 uprising drove off foreign investors. The central bank’s decision to float its pound currency in November has helped revive foreign inflows into Egyptian treasuries.
Foreign investment in Egyptian treasuries doubled to $500 million in January from December, Egypt’s deputy finance minister said last week.
Yields had begun to drop at Egypt’s weekly treasury debt auctions since the end of January as demand for the debt rose but the pace picked up last week as foreign investors’ appetite for treasury bills spiked, pushing down yields by around 2 percent on Thursday.
Yields on the 91-day bills fell on Sunday to an average of 17.050 percent from 18.621 percent at the previous auction while yields on the 266-day bills fell sharply, to 16.993 percent from 18.857 percent at the last similar auction.
About 2.2 billion Egyptian pounds ($125.36 million) of the treasury bill sale on Sunday went to foreign buyers, with 18 percent of the 91-day and 30 percent of the 266-day bill, Samy Khallaf, head of public debt in Egypt’s Finance Ministry, said.
“This decline in yields follows a previous decline so it’s a big drop and this is mainly from foreign investor interest… For foreigners these rates don’t exist anywhere else,” said one Cairo-based banker.
Foreigners have been buying more T-Bills because “they could be expecting a rate cut coming,” Allen Sandeep, head of research at Naeem Brokerage, said, referring to Egypt central bank rates, a meeting for which is scheduled for Thursday.
“They are buying now when the Egyptian pound is still weak, so they gain on the interest and currency,” Sandeep added.
Egyptian banks, which once considered treasury debt yields as a safe and high-yielding investment, say the quick drop in yields is causing them to lose interest as the yields are coming closer to the central bank’s corridor rates.
Bankers calculate that their treasury bill investments may now provide lower profitability, after deducting taxes, than the central bank’s corridor rates and as a result there may be less appetite for them from Egyptian banks.
Egypt’s overnight deposit rate is 14.75 percent and its overnight lending rate is at 15.75 percent.
“The decline in yields is rapid and aggressive and I believe it can continue. Historically foreign investors used to buy Egyptian local debt since the previous managed float and yields used to drop below the corridor rate,” another treasury banker who covers the Egyptian debt market said.
He recalled 2006 when the corridor rate was around 8 percent some treasury yields went down as low as 6 percent and they were mainly bought by foreign investors.
“We think there is a possibility to start seeing this again, The time frame is not yet clear but at this pace they are going there,” he said.
Egypt’s monetary policy meeting is due to meet on Thursday to decide on its key interest rates. The central bank kept its rate on hold during its last two meetings following a 300 basis point hike on Nov.3 when it floated the pound.
Most of the dollars coming in through investors in Egyptian debt or stock market go through the central bank’s repatriation mechanism, bankers said, meaning the liquidity does not actually enter the Egyptian banking system.
Still the pound has strengthened since the float as backlogs of U.S. dollar orders to finance imports had eased and some confidence in the Egyptian pound returned.
The Egyptian pound strengthened further on Sunday, to around 17.5 per dollar from 17.75 on Thursday. “The pound strengthening in the interbank is mainly driven by more supply than demand at banks. All banks have, to a great extent, covered big portions of their backlogs of imports,” the banker said.
($1 = 17.5500 Egyptian pounds)