Mixed global data and no sign of troublesome inflation left the UST curve back in its flattening m

Political developments were generally positive last week and were supportive of risk-on mode, however, credit bonds generally fell in price as shorter dated benchmark yields rose in response to a slew of strong economic data out of the US, which, in turn, underwrote the Federal Reserve’s plan to keep tightening monetary policy.

That said, mixed global data and no sign of troublesome inflation left the UST curve back in its flattening mode.  Yields on 2yr, 5yr, 10yr and 30yr treasuries closed the week at 2.48% (+1bp w/w), 2.80% (-2bps w/w), 2.96% (-2bps w/w) and 3.12% (-2bps w/w) respectively.  10yr Bund Yields followed suite with the UST, closing down by 2bps during the week to 0.57% while those on 10yr Gilts fell 6bps to 1.44% on the back of weaker than expected 1Q GDP growth. Weekly change in credit spreads was minimal with CDS levels on US IG and Euro Main closing at 61bps (-2bps) and 55bps (-1bp) respectively.

Bulk of the tightening of yields on long term USTs happened on Friday. Its positive impact on GCC bonds will only get to play out this week. Last week, GCC bonds generally fell in price on the back of high new supply and rising geopolitical risks. Yield on Barclays GCC bond index rose 8bps to 4.52%, led by a 7bps increase in credit spreads to 177bps.

Material increase in 10yr UST yields in the first half of the last week left  7-10yr maturity bonds as the worst hit segment in the GCC region. OMAN 27s, OILGAS 27s, EQPTRC 26s, INVCOR 27s etc all fell by more than a point last week, without any idiosyncratic news to justify the weakness.

Bonds from the financial sector, including the perpetual securities issued by the GCC banks have relatively held up well, partly due to positive results announcements and partly because of manageable new supply. Of the total $52 billion issued so far this year, only 28% is from the financial sector compared to 34% of the total $39 billion in the similar period last year.

Corporate results have been mixed. Ooredoo missed expectations, reporting revenue and profit for the 1Q at QAR 7.8 billion and QAR 486 million respectively. QTEL 28s fell more than a point to $94.6 with yield rising to 4.57% (+14bps w/w) and Z-spread at 158bps (+14bps w/w).

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

Source: Emirates NBD Research, Bloomberg

Adding to the $11 billion in USD denominated bonds issued earlier, KSA raised another $1.33 billion equivalent in SAR denominated sukuk tranches last week. It issued SAR 3.8 billion maturing in 2023, SAR 750 million maturing in 2025 and SAR 450 million maturing in 2028. This represents the sixth local currency offering by the KSA government under its SAR-denominated sukuk program. KSA’s USD curve was largely unaffected by the new SAR issuance though KSA 28s fell more than half a point in price to $93.73 and yield and Z-spread at 4.42% (+8bps) and 143bps (+6bps) respectively, mostly mirroring the movements in the wider market.

GMSEDU Perp rose to $103.77 with yield tightening 40bps to 5.02% during the week, benefitting from increasing proximity of these bonds to their call date in November 2018 amid well-established expectations of the bonds being called.

Dubai Inc curve was slightly under pressure with DUGB 29s falling more than a point to $102.3 and yield to 4.73% (+14bps w/w) during the week as investors account for rising leverage in the Emirate to fund the Expo 2020

Dana Gas stood between the conflicting rulings on dividend payment. It is restrained from paying dividends by the U.K. court but is obliged to pay under the U.A.E. law. The board is believed to have decided to defer dividend payments for the time being. The defaulted DANAGS 9% 2017s remained unchanged at around $88.

GCC bonds appear cheap compared with their emerging market counterparts. However, even though not fundamentally justified, we believe, the credit spread differential may continue to exist until the large new supply get properly digested. Also stagnating GDP growth and rising geopolitical risks in the region continue to exert pressure on investors’ sentiment and may take some time to thaw.

Though YTD issuance of circa $52 billion in the region is the highest on record, no major USD denominated deal priced last week, barring a $50 million placement by Mashreq Bank. Issuers from Qatar remain wary of support from GCC investors and have instead been tapping into the abundant liquidity available in the Asian jurisdictions. Last week, QNB and Doha Bank received funding from the Japanese market, raising JPY 3 billion and JPY 1 billion respectively.

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