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Yields drop as Egypt sells 3-year bonds

Foreigners avoid sales but local demand is strong, as another auction is planned for next Sunday

Reuters, Monday 17 Oct 2011
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Yields fell sharply at an Egyptian sale of three-year bonds on Monday compared to offers in an earlier bond auction that was cancelled, said traders, who reported strong demand from local banks but no foreign investors.

The central bank said it sold LE1.5 billion (US$251 million) of three-year bonds maturing on 18 October 2014, carrying a coupon of 14.0 per cent. The yield ranged from 13.70-14.05 per cent. Settlement will take place on 18 October.

"Almost a month ago an auction was cancelled because bids were quite high. This time they went down dramatically," said a fixed-income trader in Cairo. "I know some banks bid as high as 15 per cent last time around, which was why it was cancelled."

He said demand for the bond on Monday was high among local banks as many had been issuing long-term notes to their customers to maintain liquidity and the bond sale represented a good hedging opportunity.

The political backdrop in Egypt -- where candidates began registering for parliamentary elections last week -- had little influence on the bond auction, dealers said.

"If you are a local bank living in Egypt and your balance sheet depends on Egyptian customers, then you're not going to be looking at country risk," said the trader. "There was no expectation for foreigners to take part in this bond sale."

The central bank said on Monday that the Finance Ministry now planned to offer LE2.5 billion in five and seven-year bonds at an auction on 24 October.

Egypt's economy was pummelled by the uprising that toppled Hosni Mubarak's government in February, which prompted a sharp downturn in tourism and an exodus of foreign investors.

Local banks are lending heavily to the government as it seeks funds to cover a growing budget since the uprising and treasury yields rose steadily until this month.

Finance Minister Hazem el-Beblawi said Egypt's dependence on local borrowing to support the budget was not sustainable, in comments published in a state-owned newspaper on Monday.

"I don't see much foreign investment in T-bills until the elections are over," said the fixed-income trader, who asked not to be named.

"What is holding these guys up is political risk, but there is political risk all over the world. You cannot say we are a stable country, but our currency has been stable. (Foreign investors) are missing a very good carry."

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