The bond market selloff witnessed in major international markets finally caught up with Cyprus, since during the multiple 2&5 year bond auctions, yields raced higher, the first such move in more than a year.
Most analysts described the move as directly related to expectations that the European Central Bank will lift euro rates higher during 2006 and thus reduce the scope for the Central Bank of Cyprus to orchestrate further rate cuts in Cyprus.
The current euro-refinancing rate is at 2.5% while the Cyprus refinancing rate is at 3.25%, with the Cyprus Lombard at 4.25%. Analysts expect that if euro rates are nudged to 3% by year-end or this time next year, then Cyprus will not need to aggressively cut rates to close the gap with the euro rates ahead of the fixing of the Cyprus pound peg with the euro in May 2007 before the island joins the euro-zone in January 2008.
During the 2-year auction held on March 29, 2006, the Central Bank of Cyprus acting on behalf of the government tendered up to CYP 150 mln of 2-year notes with a coupon of 4.25%. The total value of the bids submitted was CYP 200.638.200 of which CYP 150 mln were accepted at the weighted average price of CYP 102.34 per CYP 100 nominal value representing an annual yield of 3.72% compared to 3.67% agreed at the last auction held in January 2006.
During the 10-year auction for up to CYP 50 mln bonds with a 4.5% coupon on offer, the total value of the bids submitted was CYP 107.763.000 of which CYP 50 mln were accepted at the weighted average price CYP 103.51 per CYP 100 nominal value representing an annual yield of 4.07%, up from 3.96% yield agreed at the last auction held on December 29, 2005.
T-bills continue down
Treasury bill yields on the other hand, bucked the rising trend witnessed during the 2&5 year auctions and continued to head lower. During the auction for up to CYP 80 mln Treasury Bills with date of issue 30.3.2006 and 52 weeks maturity, the total value of the bids submitted was CYP 200.413.000. The total value of bids accepted was CYP 80 mln at the weighted average price of CYP 971.75 per CYP 1.000 nominal value representing an annual yield of 2.92%, down from 2.95% agreed at the auction held on January 30.
