Egypt’s dollar bond rallies on stability hopes

Egypt’s dollar-bond yields tumbled to the lowest level in more than six months as investors increased their bets that the country will return to stability after this year’s popular revolt.

The yield on the 5.75 per cent 10-year dollar bond maturing in April 2020 fell 24 basis points, or 0.24 percentage point, in July to 5.49 per cent. The rate was 5.52 per cent on Tuesday. The Egyptian debt outperformed bonds from countries such as Tunisia, Bahrain and Morocco that also experienced popular uprisings and political unrest, data compiled by Bloomberg show.

“The worst is over, full stop,” Daniel Broby, London-based chief investment officer at Silk Invest Ltd, said in an August 1 telephone interview. “There are still protests over the weekends, there is still an election to get through, there are still uncertainties, but when it comes to facing the precipice, that risk has gone away now.”

Parliamentary elections that are scheduled following the ouster of President Hosni Mubarak pose no “major risk,” said Michel Aubenas, who helps oversee about $5.5 billion at London- based Fischer Francis Trees & Watts.

Yields on treasury bills have declined from their highest levels since 2008 as economic growth slowed and ministers linked to Mubarak were removed. Mubarak, 83, stands trial beginning on Wednesday on charges of conspiring to kill protesters. The cabinet changes and the trial were among demands of activists who camped in central Cairo for three weeks until the military dispersed them this week.

Egypt took advantage of the improved investor sentiment to sell the first two treasury bonds since the uprising in January. The Ministry of Finance issued 3 billion pounds ($504 million) of three-year bonds on August 1, paying a fixed coupon of 13.35 per cent. It raised a similar amount from the sale of two-year bonds a week earlier, paying a fixed coupon of 13.10 per cent.

The Arab country repaid a $1bn 10-year bond that matured July 11, according to Bank of New York Mellon Corp, which acted as the fiscal agency for the issuance.

Egypt is rated BB at Standard & Poor’s, two levels below investment grade and Ba3 at Moody’s Investors Service, the third-highest junk rating.

The extra yield investors demand to hold Egyptian debt instead of US Treasuries rose last month, climbing 35 basis points in July to 324, according to JPMorgan Chase & Co’s EMBI Global index. That’s down from a high of 398 basis points on March 16. Middle Eastern debt yields climbed 19 basis points on average last month to 351.

“Spreads have come down from the peaks seen in March, but they are still higher than last year,” said Michael Cirami, who helps manage $12bn at Boston-based Eaton Vance Corp. “The move in spreads and yields would need to be larger before drawing the conclusion that foreign investor sentiment has improved.”

Egypt’s default risk climbed in July, with credit default swaps rising 13 basis points to 328, according to prices from data provider CMA. The contracts have fallen 107 basis points from January 31 to 335 on Tuesday, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10m of debt.

The yield on Egypt’s dollar bond peaked at 7.07 per cent on January 31 during the height of the revolt. It has fallen for the past three months.

“Egyptian bonds were oversold following the political unrest,” Fischer Francis’s Aubenas said in an August 1 telephone interview. “Investors that want exposure to Egypt rebuilt their positions after the strong sell-off.”

Egypt’s revolt was inspired by the uprising in Tunisia that forced President Zine El Abidine Ben Ali to flee the country on January 14. Since then, protesters demanding democracy and freedom of speech have spread across the Middle East to countries including Bahrain, Morocco, Libya and Syria.

The rate on Tunisia’s 4.5 per cent euro bond maturing in June 2020 rose 4 basis points last month to 5.45 per cent, according to Bloomberg data. It was at 5.43 per cent on Tuesday. The yield on Bahrain’s 5.5 per cent dollar bond maturing in March 2020 and Morocco’s 5.375 per cent due in June 2017 fell 14 basis points in July.

“I am a ‘buy’ on Egypt and I think investors have underestimated its breathing space,” Gabriel Stern, London-based senior economist at Exotix Holdings Ltd, said by e-mail on August 1.