July 12, 2018 / 3:24 PM / in 9 days

As foreign investors exit emerging markets, Egypt treasury yields hit 1-year highs

* Foreign buying of treasuries surged after 2016 currency float

* Total foreign holdings in treasuries reached $23.1 bln in March

* EM selloff has led to $4-$5 bln exiting Egypt -bankers

By Eric Knecht

CAIRO, July 12 (Reuters) - Yields on Egyptian debt have reached one-year highs in recent weeks on the back of an estimated $4-5 billion exit from the country’s debt market, bankers and economists told Reuters, part of a global selloff in emerging markets.

Egypt’s short and long-term debt yields have been climbing since April, with 12-month bills last week hitting their highest levels since July 2017, when they peaked at 21.72 percent.

Yields cooled slightly at an auction on Thursday however, with 12-month yields falling to 19.38 percent from 19.44 percent and six-month yields declining to 19.61 percent from 19.79 percent at the last similar sale on July 5.

Economists and bankers said the higher yields are part of a broad global selloff in emerging markets that has hit Egypt, one of the world’s hottest destinations for portfolio investors last year after short-term yields touched 22 percent, the result of aggressive central bank rate hikes aimed at curbing inflation.

Foreign investment in Egyptian treasuries has surged since Egypt floated its currency in late-2016, climbing from less than $1 billion at the time to over $23 billion at the end of March, the latest available data, providing the import-dependent country a crucial source of foreign currency.

Institute of International Finance figures indicated last week that foreigners dumped a combined $12.3 billion of bonds and stocks in emerging markets in May amid higher global borrowing costs and a stronger dollar.

Despite generally improving economic indicators tied to IMF-backed economic reforms, economists and bankers said Egypt has been caught up in the sell-off.

“The high yields are a reflection of tighter liquidity dynamics, especially within emerging markets in which Egypt is a part. We’ve seen about $4 billion leave the treasuries market in the last two months,” said Hany Farahat, senior economist at the Cairo-based investment bank CI Capital.

“Higher oil prices, Federal Reserve hikes for the remainder of 2018, trade wars, all of those are factors investors are considering,” said Farahat.

Three banking sources put the outflow at as high as $5 billion, citing both lower interest from foreign buyers in the primary market and a selloff in the secondary market for Egyptian treasuries.

“This is part of a general concern among investors in emerging markets and not anything specific to Egypt. There is less demand than usual and portfolio managers are giving emerging markets lower limits,” said one Cairo-based banker.

The finance ministry declined to disclose information on foreign holdings of Egyptian debt since April and the central bank did not respond to request for comment.

Egypt’s central bank began easing its rates earlier this year, cutting them by 200 basis points. It has since held rates steady at its last two meetings however, citing inflation concerns following recent cuts to energy subsidies. (Reporting by Eric Knecht; Editing by Toby Chopra)

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