Anita Yadav - Head of Fixed Income Research
Aditya Pugalia - Analyst
Published Date: 12 March 2017
Stronger than expected economic data out of the US last week cemented the case for a rate hike at FOMC meeting on 14-15 March this week. Bear steepening of the UST curve was well justified by annualised wage growth coming in at 2.8%. Yields on 2yr and 10yr treasuries closed at 1.35% (+5bps) and 2.58% (+8bps) respectively. The risk of inflation rising faster than the current expectations has also raised the possibility of Fed having to revise the dot plots upwards.
ECB’s press conference offered little new news. President Draghi affirmed continuation of the current accommodative policy. Though improvement in economic data out of the Eurozone is encouraging, it needs to be sustainable and needs to accelerate further for the ECB to change its policy stance. That said, market participants questioned the possibility of rate hikes before finishing QE, citing the detrimental impact of negative rates on the health of the Eurozone banks. While no answers were available, yields on Eurozone sovereign bonds did rise materially with 10yr Bunds closing the week at 0.48% (+14bps).
Despite the 8% fall in Brent prices to $51/b, average credit spreads on Bloomberg Barclays GCC bond index were stable at around 133bps. That said, on an average, bond prices dropped in response to rising UST curve with yield on liquid UAE bond index closing at 3.18% (+8bps). Steepening benchmark curve translated into longer dated bonds such Qatar 46, KSA 46s, DUGB 43s etc falling more than a point and half during the week. As high investment grade rated bonds are generally more sensitive to rate hikes, likes of INTPET 21s and ETISLT 24s were also in the worst performing category during the week.
In an astonishing reflection of the appeal of sector diversification in the GCC bond market, Qatar Reinsurance Co.’s debut Tier 2 perpetual notes received more than 14x oversubscription for its $450 million offering. The deal priced at 4.95%, circa 55bps inside the initial guidance. With a rating of BBB+/stable from S&P, QATIQD perp is the highest rated subordinated debt security in the region. Yield on the paper further tightened 3bps to 4.92% in the secondary market.
Rated Baa2/stable by Moody’s and 32% Kuwait government owned Warba Bank raised $250 million in Tier 1 sukuk after receiving over 5.0x oversubscription. The deal priced at 6.5% and yield tightened to 6.35% on its debut in the secondary market trading.
Energy market related bonds that had outperformed in the recent past owing to low oil price volatility were destabilised last week. Z-spread on TPZMAR 18s widened 19bps to 676bps during the week, though bond prices remains above par.
The week had several meaningful corporate news announcements though none affected the bond prices substantially. Saudi Electric announced plans to break its electricity generation business into four independent companies, Etisalat Nigeria is looking to restructure $1.2 billion bank loan and Emirates is rumoured to be in merger talks with Etihad Airways. The merger of Emirate/Etihad, if eventuated, will likely be positive for both airlines given the possibility of synergy benefits and avoidance of competition with each other.
As was expected after the change of outlook on Qatar sovereign rating last week, S&P revised the outlook on Qatar Petroleum’s AA rating to negative.
Despite large issuance and softer oil prices, average GCC bonds outperformed their global counterparts, reflecting their low volatility characteristics. Yield widened 12bps each during the week on US IG bond index as well as on EM US composite bond index to 3.49% and 3.99% respectively while that on Barclays GCC bond index was wider by only 6bps to 3.51%. On credit basis, US IG and EM US recorded widening of 3–4bps to 124bps and 171bps respectively in OAS while that in GCC remained stable.
Relative Value in Sukuk : May 2018
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