T-bill yields drop 39bps
State shifts to s/term bonds
The prospect of a further decline in interest rates led bond market participants to snap government bonds in record numbers and at the same time drive the yield to a fresh low of 4.03%.
The fact that the government refrained from holding auctions in the longer dated bonds – 5, 10 and 15 years – gave rise to expectations that even the government wants to borrow short-term as it expects interest rates to converge faster with those of euro-zone levels.
Cyprus rates have declined by 125 basis points since the start of the year with the key refinancing rate now at 3.25%, some 125bps above the euro-zone refinancing rate at 2%. Markets expect the gap in interest rates to close by the time the Cyprus pound, now in ERM2, joins the euro-zone sometime by end of 2007 or early 2008.
This has also been the reason why people have resorted to borrowing in euros to take advantage of lower rates, then converting the proceeds into Cyprus pounds to refinance existing high cost borrowing in local currency or to buy homes. The influx has been instrumental in helping the Cyprus pound rally higher against the euro to 0.5736 or 1.7434, close to its 2.25% narrow band fluctuation level from the central peg of 0.5853 or 1.7086, though it can fluctuate in a wider band of ±15%.
During the 2-year bond auction held on July 12, the Central Bank, acting on behalf of the government, announced an auction for CYP 50 mln, but saw the issue over-subscribed more than 2:1 as CYP 113.30 mln worth of bids were tendered.
The Central Bank accepted CYP 50 mln of bids at the weighted average price of CYP 99.95 per CYP 100 nominal value for an average yield of 4.03%, down 101bps from the 5.04% yield agreed at the last 2-year auction held on April 18.
The Central Bank also held an auction for up to CYP 100 mln Treasury Bills with date of issue July 14 and 52 weeks maturity. The total value of the bids submitted was CYP 116.05 mln of which CYP 99.05 mln were accepted at the weighted average price of CYP 961.57 per CYP 1.000 nominal value representing an annual yield of 4.01%.
The new T-bill yield represents a 39bps drop compared to the 4.40% yield agreed at the auction held a month ago on June 7 and is exactly 101bps lower than the 5.20% yield agreed at the auction held on April 18.
