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Dubai: Despite a range-bound week for equity markets, institutional players continued to return to the international bond markets this week, with turnover increasing dramatically.
Tuesday in particular saw the largest day of investment-grade issuance ever in the US markets, with $17.35 billion of new deals brought to market, mostly from financial issuers.
Reduced expectations of a large rate cut by the Fed led to a sell-off in US treasuries, with corporate and sover-eign bonds outperforming.
Driving recovery
Another factor driving the current recovery in spreads is short-covering in the credit default swap market, as market participants scramble to take off hedges against long cash positions or look to extinguish outright short positions.
The HSBC/ DIFX sukuk and GCC Aggregate Indices (www.hsbcdifxindices.com) closed the week 10 basis points and four basis points tighter respectively.
The HSBC/ DIFX Senior Financials Index only tightened one basis point, as the huge scale of financial issuance from the US weighed on this portion of the market.
To put the recent performance of Gulf Cooperation Council (GCC) bonds in perspective, spreads are now back to the levels seen in mid-February, but are still 50 basis points wider than at the start of the year.
The market for dirham issuance continues to develop, with the Dh6.5 billion Dubai Government deal closely followed by last week's new Dh2.25 billion five-year deal for HSBC Middle East, issued at a spread of Eibor+70 basis points.
Buying from local clients has been supplemented by large-scale demand from European funds for dirham-denominated paper, as revaluation speculation drives the market.
Last week saw Nakheel roadshowing their upcoming two-year dirham sukuk, and Tabreed are also in the market with an dirham convertible transaction. Further issuance in this new sector is healthy for both issuers and investors alike -borrowers are able to achieve attractive funding levels, while investors are able to deploy funds in an alternative asset class to the traditional local deposit and equity markets.
- HSBC Dubai Fixed Income Trading
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