The tides are turning for foreign portfolio investment in Egypt as investors return to “favorite” carry trade: Foreign holdings of Egyptian sovereign debt rose to USD 10.6 bn by the end of June, and the first two weeks of July saw another USD 3 bn of inflows to local debt, Bloomberg reports, citing an unnamed Egyptian officials. The reversal of the massive capital outflows Egypt witnessed during the earlier months of the pandemic comes as the hunt for an attractive carry trade has brought investors back to Egypt, a longtime “favorite,” Bloomberg says.

At 6.8%, Egypt’s bonds have the fourth-highest returns in USD terms across 25 emerging markets, the business information service tracks, and EGP-denominated bonds have “one of the world’s highest” inflation-adjusted returns at 8.4%. Compared to other similar EMs like El Salvador and Sri Lanka, Egyptian bonds have seen better performance since March, Reuters says.

Egypt now has higher short-term yield and is looking at a potential rally in the EGP, making “the carry trade the most lucrative in Egypt at the moment,” Goldman Sachs Middle East and North Africa Senior Economic Farouk Soussa tells the newswire. This has been driving “significant flows” back into the country, he says.

On the downside, analysts suggest that the rally is at risk of “flatlining” due to geopolitical concerns over a potential conflict in Libya and stalled negotiations on the Grand Ethiopian Renaissance Dam threatening Egypt’s water security, as well as a labored recovery of the tourism industry, Reuters says. The “yield bonanza” is not necessarily translating into improved economic performance and “masks” weak fundamentals, says Arqaam Capital executive fixed income director Zeina Rizk.