Gulf bond markets extend their rally despite uncertain outlook

GCC debt markets have rallied since the ceasefire, but tight liquidity remains a key hurdle

Welcome to this week’s Fortune Gulf Brief. We’ll be covering:  

• Gulf bonds continue to rally despite geopolitical challenges 
• Iraq’s new PM rolls out the red carpet for U.S. companies  
• U.S. Fanatics bets on UAE gaming with new JV 
• State Street deepens Saudi presence with fund license 
• The 3 things we enjoyed reading this week 

The Gulf bond market rally is picking up momentum. 

In the week to 26 June, QatarEnergy, Avilease, Emirates NBD, FAB, Dukhan and Burjeel issued a combined $7.5bn of debt, a pretty hefty figure. 

Notable among them was UAE healthcare group Burjeel Holdings’ $500 million debut sukuk issuance. It was more than three times oversubscribed, with the orderbook peaking at $1.6 billion.  

International investors took 61% of the allocations, led by buyers from the U.K. (34%) and offshore U.S. accounts (24%), highlighting global confidence in Burjeel and the UAE market. Gulf investors accounted for the remaining 39%. 

Listed on the Abu Dhabi Securities Exchange, Burjeel’s $500 million sukuk marks the opening tranche of a $1.5 billion sukuk program , which was put on hold with the outbreak of the U.S.-Iran war in February.  

Gulf primary bond issuance came to an abrupt halt in the wake of the conflict, with corporate and sovereign bond yields jumping as geopolitical tensions escalated. 

But the markets have staged a “relief rally” since the ceasefire came into effect on 8 April, with GCC fixed-income yields benefiting from a reduction in geopolitical risk premiums. I explore all the moving parts in my online piece here.

Yield spreads between GCC investment-grade debt and U.S. Treasury bonds have narrowed to pre-war levels, reflecting investor confidence in Gulf states’ robust government reserves and optimism that the conflict will not harm issuers’ finances in the long term. 

This has seen both sovereigns and corporates raising billions of dollars in conventional bonds and sukuk over recent months. 

Long considered safe havens within emerging markets, five of the six Gulf countries—Bahrain apart—are rated investment grade by the three major credit rating agencies. Investment grade makes it easier to raise funding when the need to borrow arises. 

Not every corner of the market has recovered at the same pace, though. Spreads on speculative-grade GCC sukuk remain elevated, suggesting investors are still demanding a higher premium for riskier borrowers.  

Furthermore, the flare up in tensions over recent days is an unwelcome reminder that the region remains vulnerable to further bouts of volatility, which, as Fitch has noted, means that: ”The future yield trajectory of GCC fixed income remains uncertain.” 

Melissa Hancock
melissa.hancock@fortune.com

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This story was originally featured on Fortune.com