GCC bonds move sideways

UST yield curve continued to ascend during the week with yields on 2yr and 10yr closing up at 1.50% (+2bps) and 2.36% (+3bps) respectively as futures implied probability of a rate hike in December increased to 78% on the back of strongest YoY wage growth (2.9%) since 2010. However safe haven bid ensuing from news about North Korea planning another nuclear test helped contain the fall in sovereign bond prices in the developed world.

Regionally, GCC credit markets had mixed performance with mild softening in bond prices on the back of widening benchmark yield curve. CDS spreads on GCC sovereigns held ground well amid improvements in government budget deficits and deepening capital markets. However, cash bonds, particularly the high grade sovereign in the AA category and shorter dated bonds suffered from steepening UST curve. Barclays GCC bond index closed with yield higher by a bp to 3.40% even though credit spreads narrowed by 4bps to 130 bps during the week. 

KSA curve remained range-bound after S&P affirmed Saudi Arabia’s rating at A- citing expectations of government taking steps to consolidate public finances and maintaining liquid assets close to 100% of GDP over the next two years. KSA also benefited from IMF’s report which expects KSA reforms to boost its budget by $90 billion by 2020 from new taxes and planned cuts in subsidies. Yield on KSA 27s sukuk closed down by a bp to 3.36% compared to a 2bps widening in KSA 26s bond to 3.41% - reflecting support of sharia investors for sukuk securities.

That said, not all sukuk were bid. GMSEDU perp  (call date Dec 2018) and DIBUH perp (call date Mar 2019) recorded the highest yield widening of 84bps and 38bps respectively to reach 5.84% and 4.65% respectively. This despite the ongoing positive sentiment on both sukuk with GEMS Education planning an IPO next year and DIB having received a rating upgrade from Moody’s to A3 recently.

Bargain hunters supported bonds from Oman which are mainly issued by the sovereign, GREs and financials. Oman 21s gained quarter of a point with yield tightening 8bps to 3.37% as the country announced plans to create 25000 state jobs by year-end. The new jobs plan boosted expectations of higher economic growth although government will need to fund this via higher debt. Oman sovereign had mandated banks few weeks ago for benchmark sized offering, however is yet to tap the market.

Though corporate and financial sector bonds from Qatar traded sideways during the week, Qatar sovereign curve responded negatively to the news about 2Q GDP growth slowing to 0.6% from 2.5% in 1Q 17. Yield on Qatar 22s increased 12bps to 3.03% during the week.

In the primary market, new $10 billion issue across three tranches by Abu Dhabi government took the YTD total fixed rate dollar denominated issuance in the GCC to $74 billion. ADGB priced its 5yr, 10yr and 30yr bond tranches at T+65, T+85 and T+130bps respectively from an order book of over $30 billion.

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