Curve flattens on softer US CPI

Weaker than expected inflation data in the US coupled with lowered expectations of growth from Trump’s MAGAnomics caused UST curve to flatten last week. Yields on 2yr treasuries closed at 1.36% (-3bps) while those on 10yr were down 4bps to 2.33%.  The story was different across the pond with yields on 10year Gilts and Bunds rising to 1.31% (+4bps) and 0.59% (+5bps) respectively in response to talks about ECB pairing down QE by the beginning of 2018.

Circa 5% increase in oil prices during the week, lack of new supply and rising hopes of a non-violent resolution of the rift between Qatar and its neighbours – all combined together to fuel appetite for GCC risk. CDS spreads on GCC sovereigns were down across the board with Qatar CDS closing at 105bps (-17bps), Saudi Arabia at 104bps (-5bps) and Dubai at 122bps (-10bps) respectively. Bonds were well bid albeit amid summer induced reduction in activity levels. Bloomberg Barclays GCC index saw option adjusted spreads tighten by 6bps to 148bps and yields dropping to 3.46% (-11bps) during the week.

Difficult operating environment for the Middle-East based air carriers has seen Emirates Airline scale back employees, streamline operations as well as hire an outside consultant to assist with cost controls. There also have been rumours about possibility of combining Emirates operations with its low-cost sister Fly Dubai. Bonds issued by Emirates were largely unchanged with EMIRAT 25s closing at YTM of 4.32% (-1bp) during the week though FLYDU 19s recorded a 5bps increase in yields to 3.24% largely as a result of 11bps increase in Z-spread to 159bps.

On the credit rating front, Fitch continued the credit watch negative that it commenced in June  on A- rating on UAE based, Commercial Bank International (CBI) following a similar action on its 40% owner,  QNB’s AA- rating.  Fitch views CBI as a key affiliate of QNB as UAE is considered an important market for the Qatari group. A downgrade of QNB will trigger a downgrade of CBI. Fitch assumes that the Qatari authorities will not place a moratorium on support towards banking subsidiaries in countries in dispute. CBIUH 6.5% Perp has largely remained unaffected so far, closing the week with yields at 6.29% (-1bp).

GCC vs EM IG bonds and US IG Bonds - OAS history (bps)

Source: Emirates NBD Research, Bloomberg

Click here to download full publication