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Egypt Borrowing Costs Drop for 4th Week as Banks Lock-in Rates

July 25 (Bloomberg) -- Egypt’s borrowing costs declined and bids for one-year treasury bills rose to a three-month high as lenders sought to lock in higher rates on bets yields will keep falling once political tensions settle.

The North African country sold 4 billion Egyptian pounds ($571 million) of one-year T-bills, meeting its target as the average yield decreased 19 basis points to 13.82 percent, the lowest since March. Bids on the securities were 2.56 times the amount offered, the highest since April, according to central bank data on Bloomberg.

One-year yields plunged 158 basis points, or 1.58 percentage points, in the four auctions since the army forced former President Mohamed Mursi out of office on July 3, named an interim government and put forward a timetable for fresh elections. Egypt secured $12 billion of aid from Persian Gulf countries after the move, placing it on better economic footing once violence between Mursi’s supporters and security forces eases, said Amr Seif, chief dealer at Piraeus Bank Egypt SAE.

“When yields are going down, you try to lock on the high interest rates as long as possible,” Seif said by phone. “The market ignored the political tension but reflected the sentiment that the government will probably be more efficient.”

Egypt, which is facing the Middle East’s biggest budget deficit as a percentage of economic output, is seeking to raise a record 200 billion Egyptian pounds of local-currency debt this quarter. The average yield on 3 billion pounds of six-month bills dropped 19 basis points to 13.33 percent at today’s auction. The benchmark EGX 30 Index of equities also trimmed an earlier retreat of as much as 1.5 percent to close 0.1 percent lower at 5,352.56.

‘Very Negative’

The measure slumped 1.7 percent, the most since July 8, yesterday after Defense Minister and Deputy Prime Minister Abdelfatah al-Seesi called on all “honorable” Egyptians to rally tomorrow to back the army as it seeks to combat “terrorism.” Supporters of Mursi and his Muslim Brotherhood have held daily protests since the army’s July 3 intervention, demanding his reinstatement and frequently clashing with opponents and security forces.

The yield on the government’s benchmark $1 billion of 5.75 percent bonds maturing in 2020, which plunged more than 200 basis points in the weeks after Mursi’s removal, has climbed 16 basis points this week to 8.61 percent at 4:09 p.m. in Cairo, data compiled by Bloomberg show.

“We are in a very critical situation now, no one can expect what will happen tomorrow and how the day will end,” Margo Moussa, head of research at Cairo-based Arab Finance Brokerage, said by phone. “If violence spreads and escalates that would be very negative.”

Default Risk

Moody’s Investors Service maintained its negative outlook on Egypt’s debt yesterday and affirmed a rating of Caa1, its fifth-lowest junk score, saying the country faces a deepening political divide after Mursi’s ouster.

The Brotherhood has called Mursi’s removal a coup against Egypt’s first freely elected civilian president. The group has also planned mass rallies for tomorrow, and Essam El-Erian, vice-chairman of the Brotherhood’s Freedom and Justice Party, said al-Seesi’s call was a “threat to plunge the country into seas of blood” to which Egyptians would not respond.

Egypt’s credit default swaps, contracts insuring the nation’s debt against default, have risen 28 basis points this week to 776, after increasing 93 basis points last week.

To contact the reporter on this story: Tamim Elyan in Cairo at telyan@bloomberg.net

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

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