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Subprime aftershocks spook credit markets
Abu Dhabi Credit markets started last week on a positive note, but by Thursday spreads had started to weaken again on familiar subprime-related concerns. Spreads widened as Moody's Investor Service cut its earnings forecast for US bond insurers.
- HSBC Dubai Fixed Income Trading
- Published: 00:14 June 22, 2008
Abu Dhabi: Credit markets started last week on a positive note, but by Thursday spreads had started to weaken again on familiar subprime-related concerns. Spreads widened as Moody's Investor Service cut its earnings forecast for US bond insurers.
The previous week was characterised by fears that global inflation would force central banks to raise interest rates, potentially worsening the spreading housing crisis. Last week however, less inflationary US economic data combined with more dovish language from the central banks served to reassure the markets.
However, the market tone changed again on Thursday, as Moody's announced its ratings action on MBIA and Ambac, the two large US monoline insurers. Credit markets were further spooked by warnings from Citibank of large writedowns still to come and rumours that Merrill Lynch was going to issue a profit warning.
Both headlines raised concerns that markets would be sent weaker by forced selling from institutional investors.
Sukuk market
The GCC credit markets were not immune to the weakness as the HSBC/ DIFX Sukuk Index wid-ened by seven basis points to record a two-month high.
Despite the overall weakness in the credit environment fixed dollar-denominated corporates were well supported by institutional and retail buying. Although Taqa's stock lost over 20 per cent last week as investors sold shares to subscribe to the Dh4.15 billion of convertible bond, the existing vanilla issues ended the week with spreads unchanged (Taqa 5.62 per cent 2012 issue yields 5.53 per cent and the Taqa 6.50 per cent 2036 issue yields 7.05 per cent).
The DP World 6.25 per cent 2017 sukuk and DPWDU 6.85 per cent 2037 conventional issues, which yield 7.20 per cent and 8.05 per cent respectively, were also well supported by real money accounts, with spreads ending the week two basis points tighter.
It was reported that DP World agreed to buy a 60 per cent stake of Contarsa Sociedad de Estiba in Spain, which runs the Tarragona Container Port Terminal.
Local currency
Regional inflation numbers continue to break new highs as Abu Dhabi reported quarterly inflation at 11.5 per cent, while the UAE also posted a record jump in inflation for 2007.
Saudi Arabia and Oman reported an increase in inflation to 10.5 per cent and 12.4 per cent respectively in April. Kuwait finance minister stated that inflation stayed around 10 per cent in March following a reported increase in inflation to 10.2 per cent in February and last week Qatar reported a quarterly inflation number of 13.7 per cent.
The regional inflation concerns coupled with investors pricing in a lower probability of a US interest rate hike later this year brought the dollar peg back to the forefront. This in turn led to a revival in the activity of dirham-denominated credits, which yield between 2.50 per cent and 4.75 per cent.
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