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Dubai: Markets were range-bound with a tightening bias last week, but Friday saw a dramatic rally.
Both credit default swaps (CDS) and bonds traded in to much tighter levels as the volatility index dropped sharply to levels not seen since October 2007.
Financials continued to shore up their capital, with AIG announcing a $4 billion hybrid issue, while the M&A market started to heat up again with Hewlett-Packard announcing advanced discussions with EDS, in a deal potentially worth $13 billion.
Despite the tightening bias, GCC bonds and sukuk traded within a narrow range of 5bps all week as the HSBC/ DIFX Sukuk and GCC Aggregate indices (www.hsbcdifxindices.com) bounced off their technical resistance of 220bps and 200bps respectively.
Although these levels have been tested many times over the past four weeks, we continue to be bullish on Middle Eastern credit and believe that the markets have built up enough momentum to break through these levels.
Pakistan bonds saw an active week after the sovereign was downgraded by S&P from 'B+' to 'B' with a negative outlook. Pakistan Mobile was also placed on negative outlook.
The rating action was not a surprise in itself, but the negative outlook does reflect a surprisingly aggressive stance from S&P.
Yields on dollar-denominated Pakistan bonds widened 50 basis points on the back of this news, before recovering some of the losses on retail buying. The 2017 bonds are currently yielding 5.6 per cent.
Volumes continued to pick up in the dirham-denominated market with the new Nakheel 2010 floating rate notes particularly active. This issue was launched at 225 basis points over EIBOR and has tightened around 10 basis points in the last week. They are still yielding over 4 per cent however, and remain attractive to local investors when compared to deposit rates.
The focus in the dirham-denominated space now moves to the new Ras Al Khaimah sukuk, due to price this week. Price guidance has been set at 110 basis points over EIBOR, and the book size is currently over Dh1 billion.
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