Goldman, Pictet thinks Egypt’s USD bonds are underrated

The yield spread between Egyptian USD bonds and US treasuries currently stands at 990 bps

Goldman, Pictet are upbeat about Egypt’s USD bonds: Egypt’s USD-denominated bonds are being touted byGoldman Sachs and Pictet Asset Management as they brush away concerns about defaulting and low credit rating, Bloomberg reports.

No defaults expected: Goldman Sachs’ Head of Global Foreign Exchange Kamakshya Trivedi said that a default is less likely to happen in Egypt compared to what the market has priced; likewise, Pictet doesn’t expect to see any developing nation default this year, according to the firm’s CIO for fixed income Mary-Therese Barton.

Macroeconomic conditions are shifting in favor of lower-rated countries, especially with the Federal Reserve expected to start cutting interest rates this year, Trivedi said.

“That’s already beginning to play out,” as hard-currency bonds in emerging markets have boasted “positive momentum,” Trivedi said. This sentiment was also echoed by Barton, who said that multilateral-backed developing markets like Egypt can drive “high single-digit” returns for investors.

Teetering on the edge of distress? No Problem. The yield spread between Egyptian USD bonds and US treasuries stood at 990 bps on Wednesday — just shy of the 1k bps level that marks distress, according to data from JP Morgan Chase cited by Bloomberg. Nonetheless, Trivedi said “there is probably quite a lot of upside in the distressed sovereign category,” with Egypt being a lead example.

Remember: Egypt’s USD bonds were well into the distressed territory before the war on Gaza, with yield spreads between Egyptian USD bonds and USD treasuries reaching 1,165 basis points by the end of September. Escalation of the conflict in Gaza has caused bond markets to price in a lower likelihood of default on expectations that our international backers will ride to the rescue, which helped the spread with US treasuries narrow.

ICYMI- Citibank this week downgraded its recommendation for Egypt’s USD bonds issued in October to “marketweight” — a rating given to fixed-income securities to indicate that their yields align with market expectations — after giving the bonds an “overweight” recommendation last year.

Egypt’s credit rating has been taking hit after hit: Moody’s downgraded Egypt’s credit outlook to negative from stable last month, affirming its Caa1 rating — seven rungs into junk territory, citing concerns that IMF support would be insufficient in warding off macroeconomic challenges and currency instability in the country. Moody’s, alongside Fitch Ratings and S&P Global downgraded our sovereign credit rating twice last year.