Tighter credit spreads start in second quarter

Dubai: Bond markets got off to a flying start to the second quarter as confidence continued to build following recent action by the Federal Reserve Bank in the US.

Throughout the week the trend was towards tighter credit spreads, this despite negative news reported by UBS of a 2008 first quarter loss of 12 billion Swiss francs, following a write-down of $19 billion which was closely followed by a $4 billion write-down by Deutsche Bank.

News of an oversubscribed rights issue from UBS coupled with a statement from Merrill Lynch's CEO that they do not need to raise new capital helped bolster confidence.

Equity markets also ended the week on a positive note despite comments by Fed chairman Ben Bernanke that US "real GDP will not grow much, if at all, over the first half in 2008, and could even contract slightly"

Indices

The HSBC/DIFX Sukuk and Gulf Cooperative Council (GCC) Aggregate Indices rallied by 14bps and 6bps respectively on the back of broad-based buying, whereas the HSBC/ DIFX Senior and Subordinated financial indices both ended the week relatively unchanged, following last weeks tightening (www.hsbcdifxindices.com). Liquidity also continued to improve, with traded volumes increasing significantly.

The main news of the week was the announcement from the government of Dubai that it plans to raise up to Dh15 billion via its MTN programme.

Pressure

This put pressure on the two existing liquid dirham-denominated bonds that had rallied strongly on the back of revaluation speculation and supply shortage of dirham-denominated issues.

The Jebel Ali Free Zone Authority issue maturing 2012 dropped Dh1.25 per cent (28bps widening) and the Emirates Bank 2013 issue dropped Dh0.625 per cent (15bps widening).

The issuance programme will prove to be beneficial to the market, as a benchmark curve provides for greater transparency and will provide a further milestone in the development of the debt capital markets in the region. Roadshows for the new deal start this week.

- HSBC Dubai Fixed Income Trading