Bond yields rise less than expected after CBE rate hike

In the wake of the Central Bank of Egypt’s across-the-board 50 basis point (0.05 percent) hikes on benchmark interest rates, returns on Egyptian treasury bonds and bills have crept up by less than 20 basis points (0.02 percent).


Yields on treasury bonds and bills – in other words, the amount of interest the Egyptian government has to pay on its debt – were expected to rise in tandem with the 50 basis point increase in Central Bank interest rates, the first such increase in over a year. However, the actual increases have been considerably lower.


On Sunday, at the first treasury-bill auction since the rate hike, average yields for three-month treasury bills rose by 16 basis points to reach 11.336 percent, while nine-month bills rose by 18.9 basis points to reach 11.796 percent, according to Central Bank figures.


On Monday – the first time this week that longer-term bonds were auctioned – average yields on18-month bonds rose by 15 basis points to reach 11.993 percent, while three-year and seven-year bond yields both rose by 14.2 basis points to reach 12.663 percent and 14.572 percent, respectively, according to Reuters.


The Central Bank has not yet released its breakdown of bids at Monday’s auction, but bankers interviewed by Reuters suggested that state-owned banks had said in advance that bond yields would not rise by more than 20 basis points.


This – coupled with November’s 250 basis point increase in interest on three-year savings certificates, which was also not passed on to the government in the form of higher borrowing costs, suggests that Egypt’s public-sector banks are taking a financial hit in order to support the Central Bank’s de-dollarization initiatives and keep debt-service costs under control.


After postponing its decision by a week, the CBE’s monetary policy committee decided in its December 24 meeting to raise its benchmark rates by 50 basis points. This brought its overnight deposit rate to 9.25 percent, its overnight lending rate to 10.25 percent and its main operation rate to 9.75 percent.


By adjusting its benchmark rates, the CBE has increased the rate banks charge each other for short-term loans – a change that is usually expected to be passed on to both the government and consumers in the form of higher interest rates on bonds and business and personal loans.


In conventional monetary policy, rate hikes are used to ease inflation by encouraging saving over borrowing and spending. Doing so can also harm economic growth, a fear reflected in weak stock-market performance following the CBE’s announcement.


Egypt’s benchmark EGX30 index dropped by 0.9 percent on Sunday and another 0.1 percent on Monday, a downtrend analysts attribute to the interest-rate hikes.


In a December 24 press release explaining the rate hike, the Central Bank cited inflation, which jumped to 11.08 percent in November. By contrast, the Bank noted that Egypt’s GDP saw robust 4.2 percent growth in the 2014/15 fiscal year.


“Given the balance of risks surrounding the inflation and GDP outlooks, the [Monetary Policy Committee] judges that a rate hike is warranted to address inflationary pressures and anchor inflation expectations,” the press release concluded.


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