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Monday, 2 September 2019

Egypt’s inverted yield curve

Egypt’s inverted yield curve: The financial press last month was awash with commentary on the brief inversions of the 2-year 10-year US treasury yield curve. Here in Egypt, the yield curve has been inverted since the EGP float in November 2016. But in contrast to the prophecies of doom we’ve come to expect in the US, nobody in Egypt so much as bats an eyelid at the fact that the yield on Egyptian 10-year treasuries is currently almost 140 bps below that on 2-years. We could put this down to normalization, but in the immediate aftermath of the currency float Bloomberg was describing the inversion as a “welcome signal” from the bond market that “vindicates Egypt’s decision” to devalue the EGP.

An inverted yield curve isn’t necessarily a bad thing: Shuaa Securities’ Esraa Ahmed wrote yesterday that the inverted curve “conveys a positive perception” among bond traders of the inflationary trend and the central bank’s accommodative monetary policy. It reflects market expectations for continued easing, a path that signifies the central bank’s growing confidence in the economy.

Yields are on a downward trend: Rates have fallen more than 300 bps across the board since the beginning of the year as foreign investors piled into Egyptian debt. Unexpectedly low inflation readings and the appreciating EGP have also contributed to the strong downward pressure on yields, Ahmed says.

But the curve is unlikely to flatten anytime soon: It may be a while before yields on long-term bonds normalize and rise above short-term treasuries. The curve has actually steepened since the CBE cut rates last month: In the first auctions after the 150 bps rate cut, yields on 10-year bonds fell further than rates on short-term t-bills. The government is taking action to try to hold down short-term yields by limiting its t-bill issuances and intends to shift its focus towards bonds with longer maturities.

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