Dubai corporate bonds lead weakness in Gulf

Dubai: Markets were choppy last week as volumes were thin with many investors on vacation. Concerns and uncertainty surrounding the fate of Freddie Mac and Fannie Mae and revised analyst estimates that Leh-man will report a loss close to $1.8 billion rather than the initial modest gain expected drove markets weaker overall.

The revised expectation came in on the back of JP Morgan's mortgage write-down last week. However, markets were two-tiered in their selloff with good quality names being well-supported.

Last week CNBC reported that Lehman was considering selling 70 per cent of its asset management unit, with an option to buy it back in future and giving a 20-25 per cent stake in Lehman itself.

The Financial Times later reported that Lehman tried to sell up to half its shares to China's Citic Securities as well as Korean Development Bank (KDB), but both walked away saying that the price was too high.

By the end of the week it was reported that KDB said it may buy Lehman, which led to a positive reaction in both credit (Credit Default Swaps gapped in 110 basis points after the announcement) and equity gapped up 10 per cent on the open.

In a generally weak GCC market, it was the sukuk sector that outperformed last week. The HSBC/DIFX Sukuk Index ended around two per cent wider, while the GCC Conventional Bond Index sold off more sharply and closed with average spreads around four per cent wider.

GCC bonds broke through their recent wides last week, underperforming credit markets in Eur-ope and the US.

The weakness was again led by Dubai corporate bonds, in particular the Dubai Holding 2012s and the DP World 2017s. The DP Worlds are now yielding 390 basis points over US treasuries, or 7.75 per cent yield.

International investors have stepped back from the market for now, on account of the weakness in local equities and the headlines on the regulatory crackdown on Dubai real estate.

Last week saw the bond markets trading significantly weaker than the CDS market, as European investors continued to reduce their bond portfolios.

Although the DP World 2017s widened by 25 basis points versus US Treasuries, the CDS market in DP World remained unchanged at around 235 basis points. This represents $235,000, the annual cost of insuring $10 million against a default by DP World.

- HSBC Dubai Fixed Income Trading