T-bills yield-to-maturity surge as Iran braces for US sanctions

Following Nowruz, the Persian New Year, Iran’s treasury bills have started carrying a much higher yield-to-maturity (YTM) than corporate Sukuk, an unusual situation for sovereign securities which have fewer chances to default as they are backed by the government. MARC ROUSSOT reports.

Iranian T-bills’ YTM has dramatically increased over the past three months and is now higher than that for corporate Sukuk. From a YTM of 15-16%, most sovereign securities now carry a 29-30% while on the corporate side, Sukuk carry 22-23%.

Corporate Sukuk usually carry a higher yield as they are exposed to a wider range of risks and uncertainties than sovereign Shariah securities that are backed by the government, hence essentially risk-free.

This seems to be the first time such an unusual situation has occurred in Iran where T-bills are regularly issued. Since the beginning of the year, the Islamic Republic sold at least 18 of these instruments, worth a total of IRR250 trillion (US$5.72 billion).

T-bills have been issued for four main reasons: to absorb the excess liquidity in Iran, to deepen the capital market, to raise funds and as an instrument similar to a promissory note issued at a discount price to construction companies working on infrastructure development projects or health corporations that are part of Iran’s social security programs.

As an example, the Islamic Republic will soon sell T-bills worth IRR10 trillion (US$230.14 million) which will be utilized by the Iran Health Insurance Organization to settle its debt to hospitals.

Surging yields
T-bills’ YTM started increasing in August last year when companies in need of cash decided to trade their securities on the secondary market. The gap in YTM between corporate Sukuk and T-bills further widened since March when a higher number of T-bills began to be sold by their holders in the capital market.

“There is a supply surge and the corporations wanting to cash out on their T-bills received in place of their receivables are willing to part with their bonds at lower prices pushing [the] YTM up,” explains Payam Afzali, a corporate finance advisor at Kian Capital Investment.

“It may be that contractors from the private sector are worried about the future of Iran’s financial system, hence, they prefer to sell their T-bills at a discount price to cash in the money,” says Majid Pireh, the head of the Islamic finance group at the Securities and Exchange Organization of Iran.

T-bills’ YTM will likely continue to rise in the next few months as anxiety grows among market players due to the looming US sanctions and their potential consequences on Iran’s political landscape and financial system.

This article first appeared in IFN Volume 15 Issue 31 on the 1st of August 2018

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