Gulf's fixed income instruments offer attractive returns

Dubai: This month's turmoil in the bond markets has continued through a heavy week for economic data. The Bear Stearns bailout was initially met with concern by investors, before positive broker earnings (Goldman Sachs, Lehman, Morgan Stanley) and a 0.75 per cent rate cut by the Fed reassured the market on Tuesday.

Rumours of liquidity problems at UBS and HBOS caused further volatility, but the week ended on a positive note with equities retracing some of their losses.

Last week's Fed cut was quickly matched by rate cuts across the Gulf Cooperation Council. Speculation of a revaluation in the dollar peg continues to attract speculative inflows from international investors. Much of this money has gone into dirham-denominated new issues or bonds in the secondary market, such as the Jebel Ali Free Zone 2012 and Emirates Bank 2013 floating rate notes.

These issues have performed well of late given that they yield 3.02 per cent and 2.96 per cent respectively when compared to Wednesday's three-month Emirates Inter-bank Offered Rates (Eibor) fixing of 2.02 per cent.

Dollar-denominated bonds have suffered by comparison, with financials in particular underperforming. Bonds issued by regional banks have traded weaker as liquidity concerns stemming from the subprime crisis have impacted the sector globally.

Senior bank paper in the GCC region is typically yielding anything from four per cent to 4.8 per cent for two to five year maturities. Again, this looks an attractive level given that two-year US Treasuries are currently yielding just 1.5 per cent.

In the current environment of low deposit rates and volatile stock markets, fixed income instruments can offer investors attractive returns.

The graphic shows the interest rate returns versus libor of a basket of over 130 international sukuk and conventional Middle Eastern bonds that make up the HSBC/DIFX Aggregate Index. The spread between January and August 2007 was a fairly constant 120-150 basis points over libor, but in the eight months since the crisis hit, it has widened out significantly to today's level at 310 points.

The widening in credit spreads in the GCC region is not due to specifc credit concerns for local names, but as a result of the nervousness in global markets.

- HSBC Dubai Fixed Income Trading