By Stelios Orphanides
The search for good returns has led to an increase in demand for domestic securities as economic and financial uncertainty worldwide puts pressures on yields abroad, a source with knowledge of the situation said.
The sale of bonds in the past two days when the government collected a total of €296.9m was unrelated with uncertainty as to whether Cyprus would satisfy the conditions set by international creditors which will allow the disbursement of the last tranche of up to €400m in bailout funds before its programme ends in March, said the source, who spoke on condition of anonymity citing the lack of authorisation to talk to the press about the matter.
On Monday, the government sold a total of €75m in two-year government bonds and a day later a total of €221.9m of seven-year government bonds at an average yield of 1.83 per cent and 3.23 per cent respectively.
The government “always” puts contingency plans in place, which will help it meet its needs in such a case, the source said. “We make sure that we maintain sufficient cash reserves so that even without receiving the tranche things can continue to work smoothly,” the source added.
According to Central Bank of Cyprus’s data, the government had a total of €465.8m in cash deposited at domestic banks at the end of November, which is €52.7m more than the previous year.
“Banks, pension and provident funds, insurance companies as well as individuals,” were included among the buyers the source said. “After the last issue of an international bond in October, it became obvious that there was more interest from domestic investors who did not have the possibility of investing in that particular security, so we decided to also include this market,” the source said.
In October, the government issued a 10-year international bond at an average rate of 4.25 per cent. It was the third successful issue of debt on international markets with which Cyprus restored market access, lost in May 2011. The secondary market yield of this bond was 3.72 per cent on Wednesday, 313 basis points above the yields of respective German securities.
Cyprus is rated non-investment grade by all three major rating companies. Fitch Ratings and Moody’s Investors Service assigned Cyprus a B+ and B1 long-term rating respectively which is four notches below the investment grade. The rating by Standard & Poor’s is BB- which is the third highest speculative rating grade.
Another factor which contributed to the increase in demand for government securities was the “big tax advantage” offered to buyers of government bonds compared to depositors, the source added.
While depositors have to pay a 30 per cent tax on capital gains – income from their earnings from deposit interest – government bond investments are charged with only 3 per cent.
According to the latest central bank data, the interest rate of new household and corporate deposits with a maturity of up to 12 months in November was 1.51 per cent and 1.53 per cent respectively. As a result, a €1,000 deposit would yield €10.57 a year after tax, while investing the same amount in the seven-year government bond would generate almost three times as much.