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Strong economic data and the uncertainty relating to the US Government shutdown caused bear steepening of the US treasuries curve which received further technical support from fall in the year-end demand recorded in December for longer dated treasuries from pension funds. Yields on 2yr, 5yr and 10yr treasuries closed at 2.06% (+7bps), 2.45% (+10bps) and 2.66% (+11bps) respectively. In contrast government bonds in the UK recorded lower yields on shorter dated bonds and stable to only marginal increase in longer dated bonds. Yields on 10yr Gilts closed at 1.34% (+2bps). Subdued December inflation (core at only 0.9% y/y) in the Eurozone caused 10yr Bund yields to closed lower at 0.56% (-2bps).
Oil declining somewhat from its peak of over $70/b had little impact on appetite for credit risk. CDS levels on US IG and Euro Main closed lower by half a bp each to 48bps and 45bps respectively while average option adjusted spread on global credit index was lower by a bp to 83bps.
Regionally, GCC Bonds had a week of weak trading as prices retreated in line with increasing benchmark yields. Average yield on Barclays GCC bond index increased 4bps to 3.73%, partly counter balanced by decline in credit spreads by three bps to 125bps. Investors shrugged off the news about Qatari fighter Jet intercepting a commercial flight from the UAE.
Result announcements from banks so far have generally surprised on the upside as non-performing loans remain well contained. Solid results from Qatari banks abated fears of negative impact on their funding profile as a result of embargo from neighbors, thereby resulting in Z-spread on shorter dated bonds from Qatari banks such as QIBKQD 22s, ABQKQD 22s, QNBK 21s etc tightening a little more than average. Also talks about UAE being removed from the EU blacklist of tax havens negated any possibility of negative impact on UAE banks from reduction in outside capital, thereby keeping the bid intact for UAE banks.
Comments from DAMAC’s founder, Mr Hussein Sajwani, about his willingness to sell 15% stake in the company created a positive sentiment around the DAMAC bonds. Lowering of his stake from the current level of 72% is expected to bring more liquidity in the stock, better access to outside capital and possibly more transparency. DAMAC 22s and DAMAC 19s closed up in price with yield falling to 5.43% (-13bps) and 4.19% (-10bps) respectively during the week.
DARALA 18s that are due to mature in May this year recorded 46bps widening in yield to 4.01% as the bonds experience a pull-to-par effect and move towards par value of $99.465 from its current price of over $100.56.
Source: Bloomberg, Emirates NBD Research
Continuing to feel the pressure from negative review of its Ba1 rating by Moody’s, Ezdan Holdings bonds were down nearly a point in price during the week as benchmark yield widening was exacerbated by widening in Z-spreads. ERESQD 21s closed with yield at 7.69% (+30bps) and Z-spread at 528bps (+20bps).
Kuwait Energy bonds gave up part of the spectacular gains made in earlier weeks on the back of merger talks with SOCO International as talks remain preliminary in nature. Z-spread on KUWAIE 19s increased 169bps to 1161bps and yield closed higher at 13.78% (+175bps).
Air travel related bonds generally did well during the week as global economy picks up which is supporting increased air travel. Yield on Dubai Aerospace’s DUBAEE 22s closed 3bps lower at 4.53% as Z-spread tightened 13bps to 204bps. This compares with, its main owner – the Dubai Government’s DUGB 22s which had yield widening of 5bps to 3.15% during the week. Also although still trading at distressed levels of below par at around $75, EAPART 20s have stabilised somewhat after the payment of coupon due in December. Z-spread on EAPART 20s tightened 27bps last week to 1665bps taking the yield down to 18.99% (-18bps) as expectations built up for a viable bid for the business of Air Berlin owned – Niki Airlines
Primary market had a quiet week with no new deal pricing in the local market. Looking ahead Emirates NBD is believed to have mandated banks for a Formosa bonds.
Emirates NBD Research
