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Anita Yadav - Head of Fixed Income Research
Published Date: 26 August 2018
UST curve flattened as Fed appeared committed to continue raising rates despite the increasing fears of negative impact of the trade wars on the US GDP in the near future. Yields on 2yr, 5yr, 10yr and 30yr UST closed the week at 2.62% (+4bps w/w), 2.71% (+2bps, w/w) and 2.81% (-1bp, w/w) and 2.96% (-3bps, w/w) respectively. However, across the Atlantic, despite the possibility of a hard Brexit having increased in the recent past, the yields on 10yr Gilts and Bunds increased during the week to 1.28% (+6bps w/w) and 0.34% (+4bps w/w) as underlying economic data remained firm.
Oil prices have recently stopped being the bellwether for credit spreads as their price range has become more predictable. That said, the 5% increase in oil prices last week did help in improving risk appetite for corporate bonds. CDS levels on US IG and Euro Mian reduced to 60bps (-2bps) and 66bps (-3bps) respectively during the week.
In the region, GCC bond market had a muted week as most of the region was closed for the Eid holidays. Amid minimal trading, yield on Barclays GCC Bond index reduced to 4.41% (-5bps w/w) as credit spreads tightened to 173bps (-2bps w/w) on the back of rising oil prices.
According to the official Bahrain News Agency, finance ministers from the KSA, the UAE and the Kuwait met recently to finalise an aid package as the neighbors showed commitment to support Bahrain. Bahrain bond curve reacted positively with yield on BHRAIN 23s tightening 40bps during the week to 6.22% and 5yr CDS narrowing 51bps to 340bps.
Though the exposure of GCC banks to the Turkish economy is not very large, the recent slide in Turkish Lira has made investors cautious on certain banks such as QNB, Burgan Bank, NCB etc. that do have investments in the Turkish banking sector. That said, impact on trading prices of the senior bonds was limited. Yield on QNBK 21s reduced 5bps to 3.92% and that on BGBKKK 21s reduced one bp to 4.09% last week, mostly in sync with the wider market movements. Burgan Bank stated that its investment in Turkey operations is fully hedged against FX swings. This is turn helped to reduce the yield on its perpetual Tier 1 bond, BGBKKK Perp to 8.80% which earlier had widened to 10.75% from 7.76% three weeks ago. Saudi’s NCB said that the impact of decline in Lira is minimal as its 67.03% holding in its Turkish subsidiary TFKB contributes only 2.7% to its net income and represents only 3.7% of NCB’s net assets.
Source: Bloomberg, Emirates NBD Research
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