GCC credit spreads widened further

After raising rates by 25bps at its FOMC meeting last week, the Federal Reserve stuck to its projection of only two more rate hikes this year. In the region, following the Fed’s rate hike, central banks in the UAE, Kuwait, Bahrain, and Qatar also raised their policy rates by 25bps last week. The Saudi Arabian Monetary Authority (SAMA) has not yet changed its policy rates again after the surprise implementation of a 25bps rate hike in the previous week.  Supporting the pegged exchange rate regimes, GCC central banks are expected to follow through with the Fed’s at least another 50bps increase in rates this year.

Overall messaging from the Fed was not as troubling as expected and although sentiment remains fickle, it provided some short-term support to the bond market. Yields on 2yr, 5yr, 10yr and 30yr treasuries closed the week lower at 2.25% (-5bps w/w), 2.60% (-6bps w/w), 2.81% (-4bps w/w) and 3.06% (-3bps w/w) respectively. Consequently, corporate bond portfolios did well with yields on US Aggregate Index and Euro Aggregate Index tightening marginally to 3.17% and 0.59% respectively.

Despite a 6% increase in oil prices and tightening benchmark yield curve, the GCC bond market suffered from pressures exerted by a) large new supply; b) fears of trade wars being more negative for EM markets than the DM markets, c) fears of capital outflow from EM bonds as yields rise in the DM world; and d) negative rating trend. During the week, yield on Barclays Bloomberg GCC bond index rose 8bps to 4.29% as credit spreads widened 9bps to 170bps. However, the current level still remains below the 172bps reached in June last year. Although the current level is higher than the five year average of 162bps, we do not expect material tightening in credit spreads given rating downgrades in the last two years.

GCC credit spreads continuing to widen

Source: Bloomberg, Emirates NBD Research

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