Retail bonds start year with new high
The Public Debt Management Office (PDMO) at the Ministry of Finance has auctioned a record EUR 47.9 mln 6year retail bonds, with the January 2016 series setting the pace for the government’s financing needs in the new year.
With the 2015 total reaching EUR 205.18 mln, the PDMO will continue to offer EUR 10 mln during its monthly auctions in the primary market, which are mainly subscribed by third country nationals seeking to take advantage of Cyprus “deposits for residency” programme.
The retail bonds, offered only to individual investors, carry a higher interest rate over the 6-year period, in addition to a competitive 3% tax on interest, compared to a 30% rate on deposits in commercial banks.
The PDMO said that for the January 2016 series, it received a total of 130 applications totalling EUR 47,920,000. Of these, 114 applications were submitted by Cypriots and 16 applications by foreign investors. Offers ranged from EUR 3,000 to 2.95 mln.
The second series for 2016 will be issued on February 1, maintaining a monthly cap of EUR 10 mln, applications for which may be submitted from January 4 to 20.
The ratio of local to foreign investors had been about 1:2, but this is expected to change in favour of non-EU nationals, with any investment upward of EUR 5 mln entitling the buyer to a fast-track citizenship.
Enthusiasm in the monthly issue of 6-year retail bonds, the government’s alternative financing method after the economy crashed two years ago, recovered in September when the PDMO introduced the lower interest rates to an average 6-year yield of 2.79%, down from the 4% average at the launch of the programme.
The retail bond that aimed to raise EUR 100-120 mln a year, has so far collected more than 300 mln for the government since the programme was launched in 2014 that has only this year returned to the markets following an austere bailout programme imposed the Troika of international lenders in 2013.
As of the September 2015 series, the interest rate had been adjusted downwards by 0.25 percentage points and ranged from 2.50% for the first year to 5.50% in the final year. This works out at 2.5% for the first 24 months, 2.75% for 24-48 months, 3.00% for 48-60 months and 3.25% for 60-70 months.
Meanwhile, according to a recent PDMO presentation, the government’s total financing needs in 2016 are estimated at EUR 1.2 bln, of which 0.4 bln is short term T-Bills debt, 0.7 bln is medium/long term debt, and 0.1 bln is the fiscal deficit.
The PDMO said additional transactions will continue in the local market in 2016 and there is intent to continue international bond issuances once a year.
Meanwhile, the European Central Bank has bought EUR 285 mln worth of Cypriot government bonds up until November 30, under the Public Sector Purchase Programme (PSPP) on secondary markets, which became effective since March 2015.
Also, according to data released by the ECB, the Eurosystem bought Cypriot government bonds worth EUR 97 mln in November having first stared in July 2015.
The inclusion of the Cypriot government bonds in the extended purchase program is expected to keep having direct benefits for Cyprus, mainly through further reduction of borrowing costs and indirectly through enhancing confidence towards the economy generally and towards the domestic banking system specifically.
Purchases are conducted on the secondary market from mainly Cypriot government bondholders, ie. banks and investment funds, which are willing to sell some of their investments in Cypriot government bonds.