x Abu Dhabi, UAEMonday 24 July 2017

Window closes on UAE bond market

The charge of UAE corporate credit has abruptly entered reverse gear, as hints that the US Federal Reserve may end its easy monetary policies of the past few years send many investors scrambling for the exit.

US Federal Reserve chairman Ben Bernanke suggested his agency may begin
US Federal Reserve chairman Ben Bernanke suggested his agency may begin "tapering" the bond purchases which have formed the backbone of its quantitative easing policy. Jim Young / Reuters

The charge of UAE corporate credit has abruptly entered reverse gear, as hints that the Federal Reserve in the United States may end its monetary easing policies of the past few years sent many investors scrambling for the exit.

The HSBC/Nasdaq Dubai US Dollar Sukuk/Bond index for the UAE this week reversed moderate gains seen earlier this year with total returns turning negative, down 0.5 per cent this year. During all of 2012, the same index returned 15.1 per cent in total.

The sell-off has moved in line with a rout in US treasuries late last month after comments from the Fed chairman, Ben Bernanke, suggesting the Federal Reserve may begin "tapering" bond purchases, signalling an end to the policy known as quantitative easing.

"The move in US rates was quite brutal and a lot of people got caught off guard," said Ahmad Alanani, the senior executive officer at Exotix, a boutique investor in illiquid debt.

Now many investors in UAE credit were "hitting the panic button", he said.

The Dubai Government's 10-year bond yields have spiked 48.2 basis points to 4.398 per cent since May 22, when Mr Bernanke first discussed "tapering".

While Dubai's Government was able to raise 10-year debt from bond markets at a lower rate than the Italian government in January this year, the emirate's debts now yield 20 basis points more than Italy's. Bond yields move in the opposite direction from prices.

Fixed-income markets were overdue for a correction after a substantial rally during the past few years, said Dilawer Farazi, fixed income portfolio manager at Invest AD.

"We've not really had a proper sell-off in the region for a year and a half," he said. "Overall, valuations have had a great run, the sharp move in rates combined with expensive valuations and the time of year when traditionally investors are about to go off on holiday and book profits has resulted in what we are seeing now."

Comments from the US Federal Reserve indicating it was monitoring US economic data to determine when to scale back asset purchases had spooked investors.

"That was the point at which the sell-off gathered real pace," Mr Farazi added. "It shouldn't have been such a surprise, given the rates volatility we have already seen earlier this year, but the sell-off was due from a valuation perspective. It should create more attractive opportunities going forward." But as volatility increases in credit markets, some borrowers have been dissuaded from coming to market.

Majid Al Futtaim Holding, the developer that operates Mall of the Emirates in Dubai, pulled back on a planned sale of subordinated perpetual bonds, which rank lower in the pecking order for repayment than other bonds and which do not have a fixed maturity.

The door is not closed to all issuers. Last week, the Islamic Development Bank, which carries the strongest AAA credit rating from all three ratings agencies, sold US$1 billion in five-year sukuk with a 1.535 per cent semi-annual profit rate.

Qatar's central bank also announced yesterday that it would sell 4bn Qatari riyals (Dh4.03bn) worth of bonds and sukuk.

Many recent bond deals had been distributed to high-net worth individuals via private banks with high levels of leverage, bankers said, a factor that could amplify losses for some investors and encourage additional selling.