GCC Credit Weekly

US Treasuries had a week of range bound trading with some bear flattening as investors await developments on trade talks at the G20 meeting. Yields on 2yr, 5yr, 10yr and 30yrs USTs closed the week at 1.76% (+2bps), 1.77% (+2bps), 2.00% (-1bp) and 2.53% (-2bps) respectively. Sovereign bonds across the pond were a bit mixed with yield on 10yr Gilts increasing 2bps to 0.83% while those on 10yr Bunds declined 2bps to -0.33%.

Market volatility remained contained with VIX index at around 15 as there was no new catalyst for any change in investors’ sentiment during the week. Despite soft economic data out of the US, risky assets remained well bid with CDS levels on US IG and Euro Main closing the week lower at 54bps (-2bps) and 53bps (-1bp) respectively.

Continued geopolitical tension in the middle-east is being counter balanced by the expectation of lower global growth ahead, thereby keeping oil prices range-bound. Nevertheless, Brent crude futures closed the week 2% higher at USD 66.5 / b as Russia and Saudi Arabia agreed to extend OPEC+ production cuts by another 6 to 9 months.

Against this backdrop, GCC bonds had a constructive week, rising in price as average yield on Bloomberg Barclays GCC index fell 4bps to 3.60% amid 2bps decline in average credit spreads to 170bps. Total year-to-date return on GCC bonds exceeds 8.6% with 2.31% gain in the current month alone.

Credit protection costs on GCC sovereign generally declined with 5yr CDS on Qatar and Saudi Arabia closing down to 62bps (-2bps, w/w) and 82bps (-3bps) respectively though Abu Dhabi spread increased 3bps to 61bps without any fundamental explanation. Though Oman CDS has stablised around 336bps (unchanged, w/w), it remains noticeably higher than Bahrain at 252bps that declined another 19bps during the week.

Saudi Aramco stated that it has the experience and the infrastructure to keep crude flowing, through the Red Sea should supply through the Strait of Hormuz get disrupted.  Aramco operates a pipeline with a capacity of 5 million barrels a day that carries crude 1,200 kilometers between the Gulf and Red Sea, enabling it to ship oil from both sides of the country. However given that Aramco exports around 7 million barrels a day means it would need to find other ways of getting remaining oil to the market. Aramco bonds have generally underperformed the market recently amid rising political tensions in the region. Yield on ARAMCO 24s and ARAMCO 39s closed at 2.73% (unchg, w/w) and 4.17% (+2bps) respectively.

GCC vs EM IG bonds and US IG bonds - OAS history (%)

Source: Bloomberg, Emirates NBD Research

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