Egypt treasury bill yields seen falling further by end-2019 - economists

CAIRO - Egyptian treasury bill yields are likely to fall further this year following sharp decreases in the past three months, driven lower by a flurry of good economic news and expectations of slowing inflation, economists said.

Egyptian inflation, money supply figures and the projected budget deficit as a percentage of national output have all fallen over the last year.

Yields on 91-day treasury bills have fallen by 258 basis points (bps) since Jan. 1 and were at 17.39 percent on Tuesday.

"I predict, by the end of the year, another fall of between 200 and 300 basis points," said Angus Blair, chief operating officer at investment bank Pharos Holdings.

Allen Sandeep, head of research at Naeem Brokerage, forecast a 100 bps fall in yields by end-2019.

He said yields had fallen on the back of expectations that inflation will ease further, raising hopes of a further overnight interest rate cut by the central bank.

Sandeep said Egypt's improved risk perception and the U.S. Federal Reserve's decision not to hike rates had also helped push yields lower.

Egypt's central bank cut its rates by 100 bps in February but kept them steady on Thursday.

"While we believed that there would be a cut this month, they have very much been erring on the side of caution because there was an uptick in inflation," Blair said.

Urban inflation rose to 14.4 percent in February from 12.7 percent in January, but was down from 17.7 percent in October.

INFLATION ON "DOWNWARD TREND"

Blair said this was "very much to do with internal market issues and inefficiencies," particularly volatility in food prices, a longstanding risk to inflation in Egypt.

"I think that inflation does look to be on a downward trend," he said. "We should see further cuts this year in terms of interest rates and therefore on the yields."

Hany Farahat, senior economist at investment bank CI Capital, said yields largely depend on foreign participation in treasury auctions.

"If the positivity and the positive sentiment is enhanced going forward, then yields are going to drop," he said.

He added that the government's draft budget for the fiscal year starting on July 1 - sent to parliament on Sunday - was "well-tailored". It projects an average treasury yield of 15.5 percent, down from 18 percent in this year's budget.

"The only concern would be if the oil price moves beyond the Brent assumption in the budget of $68," Farahat said.

Farahat, who also sees yields lower by year-end, said the government tightening its money supply bodes well for investor confidence "because it's one way to regain stability for the local currency over the longer term".

Egypt's M2 money supply growth decelerated to an annual 11.55 percent in February from 11.95 percent in January.

(Reporting by Yousef Saba; Additional reporting by Patrick Werr; Writing by Yousef Saba; Editing by Patrick Werr and Gareth Jones) ((Yousef.Saba@thomsonreuters.com; +201222184730))