In line with global trend, more and more regional as well as international investors are shifting to bonds sold by GCC’s corporates and sovereigns, thus pushing their prices up and yields at a year-low level, analysts have said.
For instance, the year-to-date yield on the HSBC/Nasdaq Dubai GCC conventional US dollar bond index has fallen more than 150bps -- from 6.429 per cent on January 4, to 4.752 per cent as on September 3.
Similarly, yield on HSBC/Nasdaq Dubai GCC conventional corporate US dollar bond index has also dropped more than 150bps to 5.153 per cent on September 3 from 6.880 per cent on January 4.
Yield on HSBC/Nasdaq Dubai GCC US dollar sukuk index is also down to 4.902 per cent from 6.605 per cent in the beginning of the year, while that on HSBC/ Nasdaq Dubai GCC sovereign US dollar sukuk index has dipped more than 100bps to 4.131 per cent from 5.187 per cent in the same period.
Traditionally valued as a safe-haven instrument, the rally in the regional debt market is also being supported by low interest rate regime and bearish equity markets.
“While value as well as volumes of stocks traded on the regional bourses has come down, the appetite for regional bonds continues to be very strong both from the local as well as international investors that is reflected in the strong rally in the debt market,” Nish Popat, Senior Investment Manager, ING Investment in The Hague, told Emirates 24|7.
Additionally, he said, factors such the mixed economic data pouring in from all across the region, the central banks being very generous with regard to interest rates and the huge demand of money that is in the system, have all driven up the demand of Middle East corporate as well as sovereign bonds from local as well as international investors.
Although the total value of GCC bonds and sukuk, issued during the first half of this year dropped by 32 per cent, compared to the same period last year, to $24.2 billion, according to Kuwait Financial Centre, analysts are optimistic that more issuers will be looking to tap into the debt market.
“Since the financial crisis reached shore in this region we’ve been seeing a tremendous interests in debt market by investors, and we hope it continues as the number of market makers as well as local and international investors is increasing,” Popat said.
Globally, bonds are turning out to be flavour of the season, as concerns over economic recovery are driving investors towards from riskier investments to safer asset classes like bonds to park their money.
Analysts say, like other central banks around the world, the UAE central bank has also kept an easy monetary stance, in order to ensure that banks can rebuild their balance sheets out and additionally encourage banks to start lending again to corporates. This has prompted investors to look for instruments that are offering higher returns such as the debt market.
But do falling yields also mean corporates in the UAE and the GCC region are having a greater creditworthiness in the eyes of investors?
“While the general answer is yes, it depends on the movement of yield for the particular company based on its circumstances,” MR Raghu, Senior Vice President-Research, Kuwait Financial Centre, said.
For instance, he said, the Abu Dhabi 2014 bond yield fell by a whopping 150 bps between January to August this year. However, Aldar Properties’ bond yields in fact rose by 97 bps due to company specific developments while that of DP world stayed flat with no change.
On the flipside, however, since bond yields normally fall in an environment where bond prices are pushed higher due to higher demand, the higher demand normally stems from flight to safety where perception about economy is gloomy, analysts argue.
“Bond yields generally reflect the broad economic expectation. With yields being at the lower end of the curve, the expectation is certainly not benign for sure,” Raghu said.
Simon Putt, Regional Head of Debt Capital Market, BNP Paribas, GCC, said: “While there has been some good new supply from the region during the last couple of months, overall supply for the year still falls short of institutional investor demand. Investors are turning to the secondary market, which is adding to the dynamic to send yields lower. Even if regional yields are low, they still give an attractive pick-up vs. equivalently rated credits in Europe and the US.”
He said the market was quite oversold in the wake of the Greece and European sovereign debt crisis, and even if regional credit spreads are still compressing, we are still making up some of the lost ground.
Analysts also add that at a time when there’s not so much liquidity in the market issuers, who’re looking to price in such a market, should consider various factors.
“Issuers should definitely consider investor appetite (especially among various classes of investors) as well as global trends for corporate bond issuance. Credit rating will be a key factor along with adequate disclosure. Proactively reaching out to prospective investors with more forward-looking analysis can also help,” Raghu, said.