Anita Yadav - Head of Fixed Income Research
Published Date: 12 November 2017
US Treasury curve recorded bear steepening during the week as expectations of higher inflation from continued economic growth and pending tax reforms gained momentum. Yields on 2yr, 5yr, 10yr and 30yr treasuries rose to 1.65% (+3bps), 2.05% (+7bps), 2.40% (+8bps) and 2.88% (+9bps) respectively. Synchronized global growth led to yields across the Atlantic also increase with 10yr Gilts and Bunds closing at 1.34% (+9bps) and 0.41% (+7bps) respectively.
With little catalyst for change in the credit spreads, cash corporate bonds in the developed world moved down in price in sync with the higher benchmark yields. US corporate bonds were down by nearly 1% though YTD return still remains at a healthy 5.01%.
Despite oil prices stablising at higher levels, GCC bonds suffered from uncertainties surrounding the corruption purge in Saudi Arabia and increasing geopolitical tension in the region. And rising benchmark yields added to the woes. Barclays GCC bonds index closed the week with yield at 3.58% (+11bps) and option adjusted credit spread at 140bps, 3bps higher on the week. Steepening UST curve translated in longer dated bonds underperforming the shorter tenured ones. Also longer dated bonds tend to be held more by the international investors than the local GCC books and as result generally are more volatile than the shorter dated bonds and sukuk.
The news about and around the corruption purge in Saudi Arabia remained at the centre stage. Though it is hard to estimate the economic impact of the ongoing events on the Saudi economy as yet, sentiment on bonds from KSA became slippery. KSA 47s dropped more than four points in price to $$98.67 and YTW to 4.73% (+26bps w/w) compared with ADGB 47s at price of $97.43 (-$2.03 w/w) and YTW 4.28% (+12bps). CDS levels on GCC sovereigns increased by an average 3bps to 14bps. 5yr CDS spreads on Abu Dhabi, Kuwait and KSA were at 67bps (+4bps), 71bps (+4bps) and 105bps (+14bps w/w) respectively.
The big news of the week was S&P cutting rating on Oman from BB+ to BB with stable outlook stating that large twin deficits, financed predominantly through external borrowing are eroding Sultanate’s net asset position and the country is likely to become net external fiscal debtor by 2020. Also per capita GDP growth is likely to be negative 1.5% during 2017-2020 period. Oman’s external revenues have reduced as a result of its voluntary reduction in oil production by about 30k barrels per day. Bonds from Oman sovereign and GREs fell with OMAN 47s falling more than three points to $99.87 and YTW of 6.51% (+23bps w/w). Mazoon Electricity that recently had a strong debut in the secondary market closed down by a point to $99.72 and YTW at 5.24% (+9bps w/w).
Quarterly result announcements so far have been better than expected. Abu Dhabi’s TAQA reported 3Q loss of 194 million vs loss of 524m in the pcp, largely benefiting from reduced financing costs on the back of lower debt. Emaar malls reported 6% increase in 9m profit to AED 1.5 billion on revenue of AED 2.5 billion ( 5% higher on pcp). Nevertheless reacting to the benchmark yield increases EMAARM 24s closed the week with a 5bps increase in yields to 3.84% even though Z-spread tightened 1bp to 164bps.
Source: Bloomberg, Emirates NBD Research
Relative Value in Sukuk
Market expect 25bps Fed hike in week ahead