By Tom Pfeiffer / Reuters
CAIRO: Egypt’s secondary market in treasuries is flickering to life after a year of stagnation as companies plough excess cash into government paper and debt auctions fail to satisfy demand that is growing amid optimism that yields may have peaked.
The market was introduced in late 2010 with the aim of erasing a risk premium paid by the government to investors unable to resell treasuries. Weeks later, a popular uprising unseated Egypt’s president and sent the economy into a tailspin.
Economic policy remains hostage to an uncertain transition from military to civilian rule, foreign investors are still absent and the interim government is struggling to secure loans from external donors.
“There is more activity in the short-term tenors up to six months, but the political outlook is not clear so … there is less interest in bonds [in the secondary market],” said Heba Maaty of state-owned Banque Misr.
The finance ministry has leaned heavily on local banks for funds and often failed to raise the amounts it sought at primary debt auctions, sending yields to historic highs and leaving the secondary market starved of liquidity.
Tentative optimism that the government’s funding problems may ease is reflected in the yield on Egypt’s dollar-denominated, 5.75 percent bond maturing in 2020 , which slipped below 6.8 percent on Monday after reaching as high as 8.3 percent in early January.
Fixed-income traders say some Egyptian companies have homed in on short-term government debt for their lucrative returns while waiting for a better economic environment to invest in their own businesses.
“It’s the corporate purchases and a slight excess of liquidity of banks that has increased liquidity in the secondary market and it’s short-term debt that’s drawn most interest,” said a fixed-income trader at a Cairo investment bank.
Yields peaked?
Analysts said the secondary market had become useful for some investors who had decided that treasury yields had peaked but were unable to secure enough debt at auction. Traders said recent debt sales were subscribed almost twice over.
“Primary market yields have stabilized, so some people may be trying to lock in high yields now before they fall,” said a strategist at an Egyptian bank.
Egypt attracted solid demand at an auction of seven-year treasury bonds on Monday amid optimism that foreign donors will help ease the country’s fiscal crisis.
But with the country’s balance of payments still under severe strain after a roller-coaster year, few investors seem willing to bet on an imminent drop in state borrowing costs.
The army-backed government is eyeing $3.2 billion of funding from the International Monetary Fund but has to sell budget cuts to a potentially hostile parliament and Egypt’s fiscal policy could veer onto a new course when the military hands power to civilians at mid-year.
Fixed-income analysts said the government has extra debt to sell before the end of the fiscal year in June because successive previous auctions had fallen short.
“We don’t think rates have peaked,” said the trader. “If the IMF talks fail, rates should go higher. And the Finance Ministry needs to get the paper it had cancelled into the market in the final quarter of the year.”
