Credit spreads in the GCC bond markets are showing signs of recovery after an initial widening linked to the recent Middle East conflict, particularly in high-yield real estate corporate debt.
Markets are trading slightly tighter, bolstered by the rise in U.S. Treasury yields. Analysts indicated that the increase in U.S. yields and the persistence of bond cash prices are playing a role in the observed tightening of spreads.
Following a dip in risk sentiment last week, a rebound started on Tuesday, continuing into Thursday.
Spreads in investment-grade paper remain only slightly wider, while some high-yield sovereigns are seeing tighter spreads, although high-yield real estate corporate credit experiences significant widening.
The bond market initially underwent de-risking, particularly from Asian and international fund managers, who sold GCC credit. This movement has been interpreted as part of a wider risk-off strategy rather than a fundamental shift away from the region, which continues to showcase robust fundamentals.
Passive fund managers benchmarked to the JP Morgan Global Diversified EM Bond Index also sold off GCC assets following the bank’s announcement to remove the UAE from the index, effective 31 March.
Sector performance reveals that banks have outperformed corporates during the risk-off episode, with both senior and subordinated bank papers showing resilience compared to corporate credit. Real estate issuers, particularly those in the UAE, notably underperformed because of escalation of attacks in key locations such as Dubai and Abu Dhabi.
Market activity resumed in the latter half of Tuesday, continuing through Thursday, with buying flows indicating a renewed engagement following the initial risk-off reaction. Demand has been broad, with interest spanning both short and long-dated bonds, investment-grade names, and even some distressed real estate credits.
However, the bond issuance pipeline remains effectively shut, following the last deal from Dubai-based real estate developer Omniyat. The market is expected to remain closed for both high-yield and investment-grade issuers until conditions stabilise and the conflict subsides, with a potential surge in supply anticipated once stability returns.
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