Some investors turn cautious on Egypt's lucrative carry trade

Some foreign investors are becoming cautious about buying domestic Egyptian treasuries due to jitters over emerging markets and the sustainability of high Egyptian yields.

Egypt's central bank says its unconventional strategy to deal with the coronavirus pandemic has been successful: raising interest rates on domestic deposits, lowering domestic lending rates and allowing the currency to remain almost unchanged against the dollar.

The stability of the currency and high T-bill yields have led foreigners to buy Egyptian pounds to invest in short-term T-bills only to reconvert them to dollars when they mature, earning hefty returns. A one-year T-bill auctioned on Dec. 20 yielded 13.25% on average, before a 20% income tax.

This has made Egypt a favourite among emerging market investors since it undertook a wide-ranging reform programme under the auspices of the IMF in November 2016. But concerns are growing about whether the central bank can afford to keep supporting its currency and pay out such high yields, especially if there is another economic shock, more than a half-dozen analysts and investors said.