08 October 2011
JEDDAH - Trading in Gulf bonds over the past few days shows investors see considerable value in some of them despite the turmoil sweeping global financial markets.
Gulf credits have not been spared the aggressive selling in bond markets around the world this week.
Average yields of bonds in the HSBC Nasdaq Dubai GCC Conventional Dollar Bond index rose to 5.342 percent Tuesday from 4.900 percent at the end of last week, though they dropped back slightly Wednesday to 5.282 percent.
"The Middle East region has actually outperformed other regions - bond spreads have widened nowhere near as much as other regions," said a fixed income analyst at a bank based outside the region.
"But you don't sell when you want to sell, you sell when you can sell."
One-year Saudi riyal currency forwards, commonly seen as an indicator of sentiment towards the region, have risen in the past few weeks from minus 98 in mid-September to minus 55 now, suggesting reduced bets on riyal appreciation against its dollar peg.
But in contrast to Europe and the United States, traders and analysts say, most of the selling is not in response to a sense that the fundamental outlook for the Gulf has deteriorated. Instead, investors from outside the region are selling to raise funds to cope with losses or redemptions in their home markets.
"We've seen internationals selling because they need to balance their books by selling assets which traded at a profit, to cover the losses generated by their European and US investments," said a regional fixed income trader, requesting anonymity.
This is creating opportunities for investors with excess funds and the ability to look beyond the global crisis.
"There are plenty of examples in the region that, post sell-off, offer value, and which, when the rally sets in, could fare well," said another trader based in the United Arab Emirates.
"Regional buyers are comfortable with these credits but there are also some institutional investors out there who aren't in a position where they have to be net seller."
Initially, credits benefiting from this situation appear to be concentrated in Dubai, partly because Dubai bonds are traditionally more liquid.
Dubai's 7.75 percent 2020 sovereign bond was trading at just over 96.1 on Thursday afternoon, yielding about 8.2 percent, against all-time lows of about 93.500 hit earlier this week.
Emirates' 5.125 percent 2016 bond was being offered at around 94.717 to yield around 6.5 percent, down from about 6.7 percent on Tuesday.
And the yield of state utility DEWA's 7.375 percent 2020 issue dropped back to about 8.4 percent on Thursday from about 8.8 percent Wednesday.
"These are trading at a deep discount to par, but they are sovereign or quasi-sovereign credits with very little probability of default. They have widened unjustifiably," the UAE trader said.
Dubai's five-year credit default swaps were quoted at 544 bps Tuesday before narrowing to about 530 points at the end of day on Wednesday. Abu Dhabi and Qatar, both AA-rated credits, widened to over 130 bps Tuesday and remained at those levels Wednesday.
JEDDAH - Trading in Gulf bonds over the past few days shows investors see considerable value in some of them despite the turmoil sweeping global financial markets.
Gulf credits have not been spared the aggressive selling in bond markets around the world this week.
Average yields of bonds in the HSBC Nasdaq Dubai GCC Conventional Dollar Bond index rose to 5.342 percent Tuesday from 4.900 percent at the end of last week, though they dropped back slightly Wednesday to 5.282 percent.
"The Middle East region has actually outperformed other regions - bond spreads have widened nowhere near as much as other regions," said a fixed income analyst at a bank based outside the region.
"But you don't sell when you want to sell, you sell when you can sell."
One-year Saudi riyal currency forwards, commonly seen as an indicator of sentiment towards the region, have risen in the past few weeks from minus 98 in mid-September to minus 55 now, suggesting reduced bets on riyal appreciation against its dollar peg.
But in contrast to Europe and the United States, traders and analysts say, most of the selling is not in response to a sense that the fundamental outlook for the Gulf has deteriorated. Instead, investors from outside the region are selling to raise funds to cope with losses or redemptions in their home markets.
"We've seen internationals selling because they need to balance their books by selling assets which traded at a profit, to cover the losses generated by their European and US investments," said a regional fixed income trader, requesting anonymity.
This is creating opportunities for investors with excess funds and the ability to look beyond the global crisis.
"There are plenty of examples in the region that, post sell-off, offer value, and which, when the rally sets in, could fare well," said another trader based in the United Arab Emirates.
"Regional buyers are comfortable with these credits but there are also some institutional investors out there who aren't in a position where they have to be net seller."
Initially, credits benefiting from this situation appear to be concentrated in Dubai, partly because Dubai bonds are traditionally more liquid.
Dubai's 7.75 percent 2020 sovereign bond was trading at just over 96.1 on Thursday afternoon, yielding about 8.2 percent, against all-time lows of about 93.500 hit earlier this week.
Emirates' 5.125 percent 2016 bond was being offered at around 94.717 to yield around 6.5 percent, down from about 6.7 percent on Tuesday.
And the yield of state utility DEWA's 7.375 percent 2020 issue dropped back to about 8.4 percent on Thursday from about 8.8 percent Wednesday.
"These are trading at a deep discount to par, but they are sovereign or quasi-sovereign credits with very little probability of default. They have widened unjustifiably," the UAE trader said.
Dubai's five-year credit default swaps were quoted at 544 bps Tuesday before narrowing to about 530 points at the end of day on Wednesday. Abu Dhabi and Qatar, both AA-rated credits, widened to over 130 bps Tuesday and remained at those levels Wednesday.
© The Saudi Gazette 2011
