Egypt cuts size of T-bill auction ahead of IMF visit

Egypt reduced the size of a treasury bill auction on Monday in a what may be a sign that a recent spurt in appetite by banks for Cairo's securities is coming to an end.

Yields on some maturities have fallen by 2 percentage points since August, when the government formally asked the International Monetary Fund for a US$4.8 billion loan. An IMF team arrives in Cairo on Tuesday for two weeks of talks.

An IMF loan is seen as vital to help Egypt cover its budget deficit and boost investor confidence in the government's economic program.

Increased domestic borrowing by the government since Egypt's uprising in early 2011 had stretched the lending ability of domestic banks to its limit, pushing yields to record highs.

Many banks and investors, believing that an IMF loan would push down government borrowing costs, rushed to lock themselves into high-yield instruments over the last two months.

The average yield on 91-day T-bills edged up to 12.414 percent on Monday from 12.361 percent at last week's auction. The finance ministry sold only LE750 million ($122.9 million) of the bills compared to the LE1 billion it had asked for.

"It is a clear signal that the finance ministry is trying to cap the market yields somewhere. Whether that will be a sustainable or not is a matter of successful IMF negotiations," said Khalil al-Bawab, a fixed income specialist at EFG Hermes.

The average yield on reopened 266-day T-bills decreased to 13.090 percent from 13.451 percent at an auction two weeks ago, with the ministry selling only LE2.18 billion of the bills instead of the LE3.5 billion it sought.

The yield on reopened five-year bonds sold at an auction on Monday ranged between 13.84 percent and 14.0 percent, compared with an average yield of 14.83 percent at the last auction two weeks ago.

The central bank bought 750 million Egyptian pounds worth of the bonds, which mature on 14 August 2017. This was the same amount it had sought.

Optimism over an IMF deal, pledges of foreign financing and signs the economy was improving caused yields to drop in late September, said another fixed income analyst. The slide was extended in mid-October by increased liquidity in the market.

"I expect to see the most recent drops in yields reverse over the coming weeks, unless we see some positive news regarding negotiations with the IMF," the analyst said.

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