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Anita Yadav - Head of Fixed Income Research
Published Date: 14 July 2019
Stronger than expected inflation data amid increasing expectations of a rate cut later this month caused the US treasuries yield curve to steepen last week. Yields on 2yr, 5yr, 10yr and 30yrs USTs closed the week at 1.85% (-4bps), 1.87% (+2bps), 2.12% (+7bps) and 2.65% (+12bps) respectively. Sovereign bonds across the pond also closed lower with yield on 10yr Gilts increasing 12bps to 0.83% and that on 10yr Bunds increasing 15bps to -0.21%.
Against this backdrop, GCC bonds had a soft week as yields rose in sync with rising benchmark UST yields. Average yield on Bloomberg Barclays GCC bond index increased 3bps to 3.53% even though average credit spreads declined 2bps to 154bps on the back of nearly 4% increase in oil prices to over USD 66 / b.
Although bond prices dropped somewhat last week, demand for GCC bonds remain high as expectations of significant monetary loosening in the developed world forced investors to turn to EM bonds for the higher carry on offer. Despite rising geopolitical tension in the region, as per Bloomberg data, GCC bonds gained 2.3% in June, the biggest monthly return in more than eight years and just short of the average 2.7% return for emerging-market dollar debt.
Bahrain’s improving FX reserves and ongoing support from its neighbours is continuing to anchor investor’s interest. Bahrain yield curve continued to tighten. Yield on BHRAIN 26s dropped another 12bps to 5.11% last week. Spread of 5yr CDS on Bahrain over that of 5yr CDS on Saudi Arabia has reduced to only 165bps compared with over 275bps an year ago.
Kuwait’s parliament approved its amended budget for the current fiscal year. The revised budget reflects funding deficit to be around KWD 8.3 billion vs previous expectation of KWD 7.7 billion. The budget is based on oil price assumption of USD 55 / b. The budget deficit is expected to be funded from state reserves, thereby dampening hopes of a jumbo bond offering from Kuwait this year. Yield on AA rated KUWIB 22s increased 10bps during the week to 2.30% and that on KUWIB 27s increased 13bps to 2.60%.
The UAE government eased foreign ownership rules by allowing up to 100% ownership of local companies in 13 sectors across 122 activities. Individual emirates in the country will have flexibility to decide which activity and what sectors they allow this to happen. As per the latest Emirates NBD PMIs data, business confidence in the country is picking up pace though employment remains muted. GDP growth this year is likely to be around 2%. Credit protection costs on various emirates in the UAE have remained range bound over the last six months with that on Abu Dhabi tightening by 4 bps to 57bps and that on Dubai widening by 6bps to 132bps
Source: Bloomberg, Emirates NBD Research
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Daily Outlook: Mixed messages from US data