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Credit spreads in the GCC bond markets have retraced after an initial widening during the early days of the Middle East conflict, particularly in high‑yield real estate corporate debt. The GCC bond markets are now trading flat to slightly tighter, supported in part by the move higher in US Treasury yields, an analyst said.
“The rise in US yields and the stickiness of bond cash prices have contributed, at least in part, to the tightening in spreads. Beginning in the second half of Tuesday and continuing into today [Thursday], we’ve also seen a rebound in risk sentiment, with renewed buying interest across the region. This again highlights the resilience of the market: three to four days after the attack, regional credit spreads are effectively flat to slightly tighter,” said Fady Gendy, Senior Fixed Income Portfolio Manager at Arqaam Capital.
Spreads are only sightly wider in investment grade (lG) paper, while it is tighter in some HY sovereigns and significantly wider for HY real estate corporate credit, he added.
Early in the week, the bond market saw some derisking, particularly by Asian and international fund managers who sold GCC credit. However, the move is being viewed by the market as part of the broader risk-off strategy and not a structural pivoting away from the region which continues to benefit from strong fundamentals.
There was also some selling from passive fund managers who are benchmarked to JP Morgan Global Diversified EM Bond Index after the bank announced last week that it would remove the UAE from the index, in decrements beginning on March 31.
In terms of sector performance, banks have outperformed corporates during this recent risk-off episode, said Gendy. This outperformance has been evident not only in senior bank paper but also in subordinated issuances, both of which held up better than corporate credit.
Within the corporate space, the most notable underperformers have been real estate issuers, particularly those in the UAE, reflecting the frequency of attacks targeting locations in Dubai and Abu Dhabi, said Gendy.
In terms of curve performance, the long-end has underperformed the intermediate part of the curve, while the short-end has outperformed the most, particularly within investment grade, supported by its lower remaining life, as well as the typically stronger local bid for short dated paper, the portfolio manager said.
As for market activity, buying flows returned in the second half of Tuesday and have continued until Thursday marking a re-engagement across the market following the initial risk off reaction.
“The demand has been across the broad with interest in both short and long-dated bonds, as well as in IG names and even some of the beaten down real estate credits.”
Issuance pipeline is closed
Meanwhile, the bond issuance pipeline, already seasonally weak during Ramadan, is currently completely shut. Following the most recent deal from Dubai‑based real estate developer Omniyat, the new‑issue market has effectively closed, said Gendy.
“We expect it to remain shut for both high‑yield and investment‑grade issuers, particularly for high‑yield, until conditions stabilize and the conflict dissipates.
“Once the situation normalizes, we anticipate pent‑up supply, with issuers likely to return to the market, especially if credit spreads remain tight and investors who had fled the region begin to re‑enter gradually.”
(Reporting by Brinda Darasha; editing by Seban Scaria)
