* Sets precedent for upcoming regional issues
* 10-year maturity unusual for Islamic bond from Gulf
* Some bankers expect five- and 10-year Saudi sukuk tranches
DUBAI, Feb 8 (Reuters) - A strong performance by $1 billion of 10-year Islamic bonds from a Dubai sovereign fund suggests investors are being driven into longer maturities of Middle Eastern debt, and could encourage Saudi Arabia to issue 10-year sukuk later this year.
In late January, Investment Corp of Dubai (ICD) sold sukuk due in February 2027 with a 5.056 percent yield. The 10-year maturity was unusual for an Islamic bond from the Gulf, where most sukuk have had maturities of five or seven years.
ICD's paper started tightening in the secondary market right after it was issued, gaining 2.5 points in price on the first day of trade and has continued to firm.
Institutional investors said tightening credit spreads in the Gulf, partly due to higher oil prices in the last few months, were pushing them to look for higher yields, such as those offered by longer-dated sukuk. The ICD bond's performance had set a precedent for upcoming issuance, they said.
"As credit spreads have contracted, regional investors have been forced to extend their appetite for longer duration assets in order to generate an economic return on their investments," said Doug Bitcon, head of fixed income funds and portfolios at Dubai's Rasmala Investment Bank.
After a debut sale of $17.5 billion of conventional bonds last October, the largest emerging market bond sale to date, bankers say Riyadh is preparing for an international sukuk issue later this year. ICD's experience may influence its planning.
"ICD's performance in the secondary market will help Saudi Arabia with pricing for any future issuance in the sukuk market," said Max Wolman, senior investment manager for emerging market debt at Aberdeen Asset Management.
Some bankers believe the Saudi dollar sukuk could be offered in two tranches of five and 10 years. Government officials have said a sovereign debt issue in the international market will be made this year, but no details have been decided.
Oil prices are a wild card for the Saudi issue because although higher prices have made it easier for Gulf governments to sell debt, they have also reduced pressure on governments to do so because budget deficits have narrowed. Brent oil is around $55 a barrel, up from last year's average of $45.
Qatar's finance minister said on Monday that the country might not issue any international bonds this year because its fiscal deficit was close to disappearing.
Kuwait, which last year was planning a $10 billion overseas debt issue and mandated banks to arrange the sale, has still not gone ahead with an issue and may now reduce its size, portfolio managers said.
Nevertheless, Riyadh has projected a $52.8 billion deficit this year that appears to be based on an oil price near or even above current levels, so analysts think international debt issuance will remain necessary.
A sale of sukuk would make sense because it would open up a new pool of sharia-compliant investors for the Saudi government.
"There's a big investor base that can only buy sukuk and would be ready to buy Saudi paper," said Wolman.
(Editing by Andrew Torchia and Catherine Evans) ((Davide.Barbuscia@thomsonreuters.com;))
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