Credit spreads in the GCC bond market have rebounded after widening in the early days of the Middle East conflict, especially for high-yield real estate corporate bonds. The GCC bond market is currently flat to slightly tight, supported in part by rising US Treasury yields, one analyst said.
“Rising US yields and sticky spot bond prices are at least partially contributing to the narrowing of spreads,” said Fadi Gendi, senior fixed income portfolio manager at Arkaam. “We have also seen an improvement in risk sentiment late Tuesday and into today (Thursday), with renewed buying interest across the region. This also highlights the resilience of the market. In the three to four days since the attack, regional credit spreads have been essentially flat to slightly narrower.” capital.
Spreads are only marginally wider for investment grade (lG) paper, narrower for some HY sovereigns and significantly wider for HY real estate corporate credit, he added.
Bond markets at the beginning of the week saw risk aversion, particularly by Asian and international fund managers who sold GCC credits. However, the move is seen by the market as part of a broader risk-off strategy and not a structural shift away from a region that continues to benefit from strong fundamentals.
Passive fund managers who use the index as a benchmark also sold off after JPMorgan announced last week that it would phase out the UAE from the index starting March 31.
Mr Gendy said that in terms of sector performance, banks had outperformed corporates during the recent risk-off phase. This outperformance is evident not only in senior bank paper, but also in subordinated issues, both of which have held up better than corporate credit.
In the corporate sector, the most notable underperformance was in real estate issuers, particularly those in the United Arab Emirates, reflecting the frequency of attacks targeting locations in Dubai and Abu Dhabi, Genndy said.
In terms of curve performance, the long end has underperformed in the middle of the curve, while the short end has outperformed the most, particularly within investment grade, due to shorter maturities and typically stronger local short-term debt auctions, the portfolio manager said.
In terms of market activity, buying flow returned late on Tuesday and continued into Thursday, with renewed engagement seen across the market following an initial risk-off reaction.
“Demand is broad-based, with interest in short-term and long-term debt as well as IG names and some battered real estate credits.”
Publish pipeline is closed
Meanwhile, the bond issuance pipeline has already experienced a seasonal slump during Ramadan and is now completely shut down. Following the recent deal with Dubai-based real estate developer Omniyat, the new issue market has effectively been shut down, Gendy said.
“We expect high-yield and investment-grade issuers, particularly high-yield issuers, to remain closed until the situation stabilizes and disputes are resolved.
“Once the situation normalizes, we expect pent-up supply and are likely to see issuers return to the market, especially if credit spreads remain tight and investors who have fled the region begin to gradually re-enter.”
(Reporting by Brinda Darasha; Editing by Sevan Scalia)
brinda.darasha@lseg.com
