Egypt T-Bill Yield Plunges to 10-Month Low as BofA Expects Rally

Egypt’s local-currency borrowing costs fell to a 10-month low after Bank of America Merill Lynch predicted the debt will catch up with a rally in other Egyptian assets once the nation secures International Monetary Fund aid.

The average yield on one-year treasury bills dropped 74 basis points, or 0.74 percentage point, to 15.01 percent, the lowest since November, at today’s auction of 3.5 billion pounds ($574 million) of the notes, according to central bank data on Bloomberg. The North African nation also issued 2 billion pounds of six-month notes at 14.25 percent, down 85 basis points.

Bill yields may plunge 300 basis points in the year after the government reaches an agreement for an IMF loan of as much as $4.8 billion, BofA Merrill Lynch said in a report today. The talks are set to resume later this month. Local-currency debt yields have stayed near record highs even as Egypt’s credit risk dropped and dollar-denominated bonds rallied this quarter after the country swore in its first democratically elected president.

“We see room for T-bill yields to compress materially” in the year following the agreement, London-based BofA economist Jean-Michel Saliba wrote. “T-bill yields have remained so far sticky near their highs, lagging the impressive rally in equities and CDS.”

Five-year CDS, or credit default swaps, have plunged 220 basis points to 405 yesterday since July 1, according to data provider CMA, as President Mohamed Mursi took office and the country secured pledges from Qatar to deposit $2 billion with its central bank. Qatar has also made investment pledges valued at $18 billion. Egypt’s EGX 30 index has rallied 56 percent in 2012, making it the world’s best-performing gauge among 92 tracked by Bloomberg.

Police Clashes

The drop in yields came even as protesters clashed with police around the U.S. Embassy in central Cairo in a rally against a film seen as insulting Islam.

While the unrest caused the benchmark EGX 30 stock index to drop 1.1 percent today, it’s unlikely to derail this year’s rally as investors remain optimistic about the prospects of external financing, Wafik Dawood, the director of institutional sales at Cairo-based Mega Investments Securities said by phone.

The one-year bill yield rose to as high as 15.975 percent in February after foreign investors fled Egyptian assets following last year’s revolt. The IMF agreement, which Prime Minister Hisham Qandil said may be concluded by the end of November, will help lure investors, easing a local-currency funding squeeze at domestic banks, Saliba wrote.

Raising Funds

The government will seek to raise 1 billion pounds at its first offering of two-year floating-rate notes next week, looking to diversify borrowing tools and lengthen debt maturity. The planned sale may suggest “increased comfort among authorities that enough external support will be provided to relieve pressure on interest rates,” Saliba wrote.

The yield on Egypt’s 5.75 percent dollar bonds due April 2020 rose three basis points to 5.21 percent at 4:15 p.m. in Cairo, according to data compiled by Bloomberg. The yield has tumbled 279 basis points this year. The Egyptian pound, subject to managed float, was little changed at 6.0925 a dollar.

CMA is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. CDS contracts pay the buyer face value if the borrower fails to meet its obligations.

To contact the reporter on this story: Alaa Shahine in Dubai at asalha@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

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