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Bahrain turmoil cuts demand for sukuk

Islamic bonds sink as investors demand higher yield amid concerns that unrest is spreading across the Middle East

Gulf News

Sydney/Dubai: Relative yields on Bahrain's Islamic bonds widened to an 11-month high as anti-government protests that led to five deaths spurred concerns unrest that started in Tunisia and Egypt is spreading across the Middle East.

Bahrain's 6.247 per cent five-year sukuk due in June 2014 dropped, pushing the yield up 62 basis points, or 0.62 percentage point, this week to 3.87 per cent yesterday. The spread over US Treasuries widened to 222, the biggest gap since March, according to data compiled by Bloomberg.

Average yields on Shariah-compliant sukuk from the six-nation Gulf Cooperation Council have risen 42 basis points since Egyptian protests began Jan. 25 to 5.72 percent yesterday, the HSBC/Nasdaq Dubai GCC US Dollar Sukuk Index shows.

Bahrain Islamic Bank BSC, Exotix and EFG-Hermes UAE said investors are demanding higher yields after Bahrain's army fired teargas shells, buckshot and rubber bullets in the capital, Manama, on Thursday to quell an uprising by pro-democracy protesters. The rallies follow the ouster of long-term rulers by popular movements in Egypt and Tunisia. The Middle East, where Islam is the dominant religion, accounts for 57 per cent of the world's proven oil reserves, data compiled by Bloomberg show.

"The risk of contagion is materialising a bit faster than most had imagined," said Ahmad Al Anani, Dubai-based head of fixed-income sales for the Middle East and Africa at investment bank Exotix.

"If the current events in Bahrain and Yemen boil on and we start seeing similar events in other countries in the region, then risk aversion will lead to further widening of spreads."

The yield on Bahrain's 5.5 per cent non-Islamic dollar bond due 2020 climbed 39 basis points to 6.47 per cent last week, according to Bloomberg data. The cost of insuring the sovereign debt of Bahrain jumped 6 basis points to 292 yesterday, the highest since July 2009, according to CMA prices for credit-default swaps.

The difference between the average yield for GCC sukuk and the London interbank offered rate widened 11 basis points to 347 since Jan. 25, according to the HSBC/Nasdaq Dubai GCC US Dollar Sukuk Index.

Cost of public debt insurance rises

The cost of insuring the government debt of Bahrain continued to rise yesterday, as anti-government demonstrations entered its fifth full day.

At around 1130 GMT, the country's five-year credit default swap spread rose 24 basis points to 305 basis points, surpassing the 300 basis-points level for the first time since August 2009, according to data-provider Markit. A rise of one basis point in the cost of five-year CDS equates to a $1,000 (Dh3,672) rise in the annual cost of protecting $10 million of debt for five years. On Thursday, Fitch Ratings said it was considering a downgrade for the embattled Gulf island nation, citing unrest that has created economic and political uncertainties, which increases risks to the country's credit profile.