Gulf bonds shine amid US turmoil

Dubai: The focus of the markets returned to US financials last week, as hopes that the credit crunch had passed proved to be premature.

Concerns surfaced that US banks might be held accountable for the freeze in the auction rate securities market, while RBS, Citibank and AIG all reported worse-than-expected numbers.

Local bond markets were range-bound, with most of the weakness being expressed through the credit derivatives market.

More trouble

Under pressure from investors claiming to have been misled over their investments in the auction rate market, Merrill Lynch, Citibank and UBS were the first securities houses to formally offer compensation last week. The markets were spooked by the scale of the deal, and the prospect that regulators may force other banks to follow the same course.

AIG reported an unexpected $5.36 billion second quarter loss after the closing bell last Thursday. This represented almost a $10 billion swing compared to the $4.28 billion gain it reported the previous year.

AIG shares led other fin-ancials in a sector-wide slump of 5 per cent in the equity market. This was compounded the next day by a £5.9 billion writedown from RBS.

In local markets the big news last week was the Taqa (Abu Dhabi National Energy Co) results. First-half earnings came in at a positive 21 fils per share, compared to six fils the previous year. However, the results were bolstered by acquisitions and higher energy prices, so spreads were little changed on Taqa bonds.

GCC bonds outperformed global markets last week, with the HSBC/DIFX Indices (www.hsbcdifxindices.com) closing roughly unchanged on the week. With bond markets relatively benign, it was left to the Credit Default Swap market to reflect the growing turmoil in international markets.

CDS are commonly used both by banks and other institutional clients to hedge exposure in the fixed income markets, and it was these flows that sent the markets weaker last week. For example, the annual cost of insuring $10 million against default moved from $180,000 to $200,000 for Mashreqbank, and $175,000 to $195,000 for Emirates airline.

Compared to its European and US peers, the Middle East is unusual in that its bond market is currently more active than its CDS market, but increased lending activity has led to a rapid expansion of the asset class.

- HSBC Dubai Fixed Income Trading