Gulf bonds enter calmer waters after week of mayhem

Dubai: It was a relatively quiet week for the bond markets, as confidence gradually returned after the Bear Stearns-inspired mayhem of last week.

The Fed's liquidity measures helped to ease the pressure on financial institutions such as HBOS, UBS and Lehman Brothers, while the JP Morgan bid for Bear Stearns, now raised to $10 per share, looked increasingly likely to be accepted.

Financial shares and bonds rallied as expected, but are still to return to the levels seen before last week's crisis. Although the extreme risk-aversion of early last week has eased to some extent, the focus now moves from liquidity concerns to worries over the depth of a US recession.

The HSBC/ DIFX Sukuk and GCC Aggregate Indices rallied by 7bps and 13bps respectively on the back of retail buying last week. Although Middle East markets have been thin and jittery, technical pressures seem to be easing. Clients are starting to focus on the region's strong fundamentals, indicating that markets may have found some support.

Locally, the banking sector received another boost in the shape of a $500 million rights issue for Arab Banking Corporation. This follows the recently-announced $1 billion injection for Gulf International bank, and serves to underline the strong support that many GCC financial institutions can expect from their shareholders. With senior bank bonds typically yielding four per cent to 4.8 per cent for two to five year maturity, and subordinated bonds yielding six per cent to 6.8 per cent, many investors continue to see value in this space.

Today's chart shows that GCC senior financials have performed well, with yields falling around 10 basis points. A similar story is reflected in the subordinated financials, which have rallied by 28bps in the previous two weeks.

Comments from the IMF on GCC inflation (the 2007 numbers were: UAE 11 per cent and Saudi Arabia 4.1 per cent) encouraged further speculative flows into dirham-denominated assets last week. Investors are anticipating a revaluation as US rates continue to drop, and have therefore been putting their money into dirham-denominated bonds like Jebel Ali Free Zone 2012s and Emirates Bank 2013s. Both are yielding 2.5-3 per cent.

- HSBC Dubai Fixed Income Trading