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Abu Dhabi: Last week brought no respite for the credit markets, as traders focused on a combination of global inflation and concerns over US creditworthiness.
International equity markets closed the week down, bond markets sold off and regional markets fared no better. Oil reached record levels once again though, as Iranian missile tests pushed crude close to $150.
Growing financial stress at the two largest US mortgage finance companies, Freddie Mac and Fannie Mae, continued to weigh on the markets.
The weak tone extended to the GCC credit markets, as the HSBC/DIFX Sukuk Index (www.hsbcdifxindices.com) widened another two bps. The Index, measuring the average spread vs Libor of a portfolio of sukuk, is now at its widest point of the year.
Credit default swaps
Credit markets in the GCC continue to develop, and the expansion of the Credit Default Swap (CDS) market is the latest example. Referencing an underlying bond, these contracts offer insurance against default by an issuer.
CDS are used both by banks to hedge loan exposure, and other clients to gain exposure to companies when it might not be practical to buy a bond.
The Middle East is unusual in that its bond market is currently more active than its CDS market, but it should move more in line with its European and US peers.
Depegging speculation
For the past six months the potential revaluation of the UAE dirham has been the main story in the local credit markets. Speculation has now begun to tail off, despite a weaker US dollar and worsening inflationary pressures, and dirham-denominated bonds have suffered accordingly.
UAE corporates such as Jafza, Dewa and Aldar have all tapped the market in dirhams but it seems, at least for now, that this window of opportunity has closed.
Dirham-denominated bonds closed the week 10-15 basis points wider, with the benchmark NAKHL 2010s yielding 4.65 per cent, or 223 basis points over Eibor.
HSBC Dubai Fixed Income Trading
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