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Anita Yadav - Head of Fixed Income Research
Published Date: 29 July 2019
Economic data out of the US last week was generally better than expected, pointing to GDP growth remaining well above 2% in the last quarter. Consequently, the UST yield curve shifted slightly upwards even though the chance of a rate cut at FOMC’s meeting on 31st July remains intact at 100%. Yield on 2yr, 5yr and 10yr US treasuries closed the week at 1.85% (+4bps), 1.85% (+4bps) and 2.07% (+2bps) respectively. Across the pond, the ECB’s dovish outlook pushed European sovereign bonds higher with yield on 10yr Bunds and Gilts declining 3bps to -0.38% and 2bps to 0.69% respectively during the week. Solid quarterly result announcement supported credit default protection costs to remain low with 5yr CDS levels on US IG and Euro Main closing the week lower at 51bps (-3bps) and 47bps (-2bps) respectively.
Though geopolitical concerns relating to the tension between the US and Iran showed no sign of abating, financial market participants are not expecting a militarized conflict. Oil prices during the week were largely unchanged at around USD 63 /b.
Against this backdrop, GCC bonds had a constructive week. With more than USD 13 tn worth of global bonds trading at negative yields, emerging market bonds are benefiting from investors’ hunt for yield. Adding to the bid ensuing from index inclusion, demand for GCC bonds was high, thereby facilitating average yield on Bloomberg Barclays GCC bond index to drop 4bps to 3.40% last week and credit spreads to tighten 9bps to 143bps.
Moody’s affirmed Government of Sharjah’s rating at A3 but changed the outlook to negative citing concerns about Sharjah’s deteriorating fiscal position even though the emirate has a well diversified economy and benefits from being part of the higher rated, Aa2/stable, federal structure of the UAE. Nevertheless, much in sync with the wider market, yield on SHARKSK 26 sukuk declined 7bps to 3.16% last week.
In terms of mergers in the banking space, while Kuwait Finance House continues to make progress on due diligence towards merging with Bahrain’s Ahli United bank, regulators in both countries are taking longer than expected, causing delays in the execution of merger plans announced nearly six months ago.
In the interim, earnings announcements from the banking sector remain solid with ADIB, Doha Bank, RAK Bank, KFH, Qatar Islamic Bank, First Abu Dhabi Bank and Mashreqbank etc all announcing better than expected results during the week. That said, National Bank of Oman and Bank Dhofar reported slightly weaker results. Strong result from Emirates NBD earlier in the month and progress on its acquisition of Denizbank boosted the bid for ENBD risk. Credit spread on EBIUH 39s narrowed 52bps last week to 168bps causing yield to drop from 4.34% to 3.85%.
Source: Bloomberg, Emirates NBD Research
GCC Credit Weekly
GCC Bonds Monitor
GCC Credit Weekly
Relative value in global sukuk
Daily Outlook: Mixed messages from US data