Bahrain makes a strong comeback among sovereigns

Among the sovereigns, Bahrain has experienced a very strong comeback, driven by both investor demand and short covering by dealers, according to Invest AD’s Middle East and Africa markets outlook.

In a market where most bonds have moved up between 0.50 and 1.00 points, Bahrain 22s rallied from 99.50 a couple of weeks ago to trade around the 102 mark – indicating that investors continue to look at the bond to add risk.

Middle East credit markets are expected to see positive momentum continue into September, with investors seeking to add risk as the new issuance pipeline reopens, following a pause for Ramadan,

In an interesting new trend, sukuk funds, which have historically focused on investment-grade papers, are now starting to look at non-investment-grade papers such as Jafza19. If this trend is sustained, it should be very supportive for Dubai bonds, as a new wave of bond issuance gets underway.

In Abu Dhabi, the most active name continues to be IPIC, with the belly of the curve currently trading in decent size. Investors view the bonds as attractively valued compared to the Abu Dhabi and Qatar sovereigns or other corporates such as Taqa, given IPIC’s 100% sovereign ownership and AA rating.

The last week of August also saw strong demand for financial names in Abu Dhabi and Dubai. The most active bonds included First Gulf Bank and Emirates NBD, which investors still perceive to hold some relative value. These names have also seen continuous buying, from local accounts and real money Asian accounts – both on the conventional and sukuk fronts.

On the CDS side, activity continues to remain muted, with most remaining unchanged in the last few trading sessions. The short-dated tenors are starting to be better offered in the market ahead of the upcoming CDS roll, especially on the Dubai sovereign and select corporates.

The global macroeconomic backdrop continues to remain volatile. US data seems to show signs of improving growth, with GDP and housing data coming in better than expected. On the other hand, the situation in Europe and Asia continues to remain grim as data suggest that growth is slowing in the big economies of China, India and Japan. Investors are increasingly worried by renewed signs of trouble in Spain, where regional governments have started to seek bailouts.

One of the main reasons for the calm in European sovereign debt market in the last few weeks was that there was little supply from troubled issuers, with both Italy and Spain cancelling mid-August auctions. With both countries resuming auctions in the coming week, investors will be closely watching for any indication of trouble to determine the future direction of rates.

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