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Anita Yadav - Head of Fixed Income Research
Published Date: 16 June 2019
Last week saw treasuries rallying amid soft economic data out of the US and fragile market sentiment ahead of the G-20 summit which may provide a breakthrough in the stalled US-China trade talks. Yields on 2yr, 5yr, 10yr and 30yrs USTs closed the week at 1.84% (-6bps), 1.83% (-8bps), 2.08% (-7bp) and 2.59% (-4bps) respectively. Sovereign bonds across the pond were a bit mixed with yield on 10yr Gilts increasing 1bp to 0.84% while those on 10yr Bunds declined 4bps to -0.26%. Although geopolitical risks remain elevated, volatility in financial markets declined with VIX index reducing to 15.3 from 16.3 in the previous week. The bid for risky assets was kept intact probably by the increasing possibility of supportive central bank policies. Credit protection costs declined in tandem with CDS spread on US IG and Euro Main closing down by a bp to 62bps each.
Regionally, GCC Bonds closed largely unchanged with yield in Bloomberg Barclays GCC index remaining stable at around 3.73% and credit spreads at around 174 bps. Attacks on six tankers over the last few weeks have not fired up the oil market with Brent Crude actually declining 14% since the beginning of May this year to $62/b now. So far at least, it appears that participants are not expecting these incidents to lead to any major conflict. In fact, surging US production and fears of trade wars denting global demand and are keeping a lid on oil prices.
Nevertheless, amid the rising political concerns in the region, demand for credit protection increased, pushing GCC sovereign CDS spreads higher. Spread on 5yr CDS on Saudi Arabia closed at 88bps (+3bps, w/w), on Qatar at 67bps (+2bps), on Abu Dhabi at 62bps (+1bp) and Dubai at 141bps (+6bps).
Despite the declining benchmark yield curve, yield on Aramco bonds increased during the week as credit spreads widened on the back of volatile oil prices. ARAMCO 49s fell more than a point to close at USD 98.59 and yield increased 4bps to 4.46%. Nevertheless, ARAMCO curve still remains a tad tighter than the KSA sovereign curve. KSA 50s also fell as yield increased 5bps to 4.54%. Meanwhile, as per media reports and interview of the KSA crown prince, the KSA government appears committed to selling shares in Aramco in 2020-2021 and has made noticeable progress on its Vision 2030. The KSA plans to finalise privation deals worth SAR 2 billion (USD 533 million) before the end of this year. The privatization drive mainly includes projects in education and healthcare sectors.
Oman has introduced 100% tax on tobacco, alcohol and pork meat from June 15, as the government endeavor to pare its reliance on oil revenue. Omani sovereign yield curve tightened with yield on OMAN 27 narrowing 8bps to 6.45% during the week.
Source: Emirates NBD Research
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