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Another successful t-bill auction — this time at a significantly lower interest rate. The Finance Ministry raised some EGP 25 bn worth of one-year t-bills and EGP 35 bn worth of six-month bills on Thursday, according to data on the central bank’s website. The average yield of the one-year bills dropped to 25.9% from a record high32.3% earlier this month, while the six-month bills‘s average yield dropped to 25.75% from 31.84%.
Demand is still high: The one-year bills received offers over 4x its original ask and six-month bills 2x its ask. Short-term local debt has been extremely attractive to both local and foreign investors since the central bank floated the EGP, with the central bank’s many t-bills auctions post float being met with high demand — a one-year bill auction a week earlier was met with a record EGP 408.1bn in demand.
Which explains the dip in yields: With the market stabilizing, the EGP finding its balance post float, and FX inflows resuming, investor confidence in Egypt and its economic stability has returned, meaning the central bank no longer needs to auction off bills at extremely high yields to reel investors in.
Also helping: The risk of further currency depreciation has waned and the premium to hold t-bills rose to a record compared to other emerging-market notes, sparking a renewed interest in carry trade — the process by which investors borrow at low interest rates to invest in emerging market currencies at higher rates. “Investors had waited for an inflection point in the local market story to get involved in size in carry trade positions,” Standard Chartered Bank’s Head of Africa Strategy Samir Gadio told Bloomberg.
But the boom could be short lived: “While t-bill auction demand is still robust, it could moderate further from recent record highs as yields ease,” Gadio added. “There was probably a lot of t-bill demand front-loading immediately after the devaluation.”
It’s more or less the same story for bonds: Last week the bank auctioned off EGP 2.9 bn in EGP fixed coupon three-year t-bonds at an average yield of 25.46% down from 26.23% earlier in the month. The auction saw bids for rates as high as 45%. Higher pricing on longer-term instruments generally reflects investors’ views of risk on that time horizon — but can also simply be a case of investors waiting to lock in better returns by seeing whether they can bid up the yield.
