Dubai bond and sukuk yields spiked yesterday in the worst day of trading for the emirate's government debt in more than 18 months, with some brokers triggering margin calls for highly leveraged investors.
The yield on the Dubai Government's 10-year sukuk, launched in January with a profit rate of 3.875 per cent, soared 22.5 basis points to 4.972 per cent. Bond yields move in the opposite direction from price.
At the time it was sold, the Government was able to borrow for 10-year capital at a cheaper rate than Italy - which is now trading with a yield of 4.73 per cent.
Dubai's Islamic bonds launched in January have now added 105.9 basis points since the Federal Reserve first discussed tapering its monthly bond purchases last month.
"The markets have reacted pretty aggressively and negatively," said Chandru Bhatia, a portfolio manager at Rasmala Investment Bank.
"We're still not buyers - we're not stepping into the market and we're on the sidelines."
Although some yields on Dubai debts were now starting to look "attractive", a period of stability would be needed before more buyers stepped in, Mr Bhatia added.
Yields on Dubai's10-year bonds, which have outperformed sukuk during the past month, rose 31.1 basis points to 4.866 per cent yesterday, the worst day of trading since October 2011.
Stock markets pared much of their year-to-date gains, with the Dubai Financial Market General Index falling as much as 5.1 per cent before rallying to close down 1.9 per cent at 2,255.97. It was the third consecutive day of declines for the index.
The Abu Dhabi Securities Exchange General Index fell 1.8 per cent before paring losses to close down 1 per cent at 3,526.54.
"Some stock-brokerage companies went aggressive on margin," said Mohammad Al Mortada Al Dandashi, managing director of Al Ramz Securities in Abu Dhabi.
* additional reporting by Hadeel Al Sayegh