DUBAI: Dubai’s Islamic bonds tumbled the most in six months last week as investor concern over Europe’s growing debt crisis prompted a sell-off of the region’s riskier assets.
The yield on the 6.396 percent dollar sukuk maturing in November 2014 climbed 22 basis points, or 0.22 percentage point, the biggest weekly gain since November and the steepest among Arab Gulf issuers, to 4.83 percent Friday, Bloomberg prices show.
The rate fell to a record low of 4.6 percent on May 19. The average yield of Gulf sukuk was unchanged last week at 4.55 percent as yields on Bahrain’s government bond dropped, according to the HSBC/NASDAQ Dubai GCC U.S. Dollar Sukuk Index.
“Dubai’s sukuk rallied during the Mideast crisis when investors identified the emirate as a safe haven in the region,” Mark Watts, head of fixed-income at National Bank of Abu Dhabi PJSC’s asset management group, which manages 4.1 billion dirhams ($1.1 billion).
However, “Dubai remains in the eyes of the market a weaker credit and as such its securities remain vulnerable to sell-offs when market sentiment turns,” he said.
The emirate, which doesn’t have a rating, and its companies ran up debt of at least $129.3 billion, according to estimates by Credit Suisse Group AG, as Dubai developed its property, tourism, trade and financial-services industries. The sheikhdom rattled global markets in November 2009 after state-owned Dubai World said it will renegotiate about $25 billion in debt.
The cost of insuring Dubai’s debt against default rose six basis points last week to 340, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The rate is the third highest in the Middle East after Lebanon and Egypt, according to CMA data on Bloomberg.
Greece’s prime minister last week failed to secure support from the country’s main opposition parties for new austerity measures, threatening his efforts to keep bailout funds flowing and avoid default.
EU leaders are considering new loans and a voluntary extension of bond repayments for Greece to close a funding gap in 2012 of about 30 billion euros ($43 billion).
Bondholders of Greek, Irish and Portuguese debt may have “significant losses” because of Europe’s economic crisis, Nobel laureate Paul Krugman said last Thursday.
“Over the previous couple of months, we’ve had a straight line rally in regional fixed income, so last week saw some probably overdue profit taking,” Akber Khan, director at Al-Rayan Investment in the Qatari capital Doha, said in a telephone interview Sunday.
The yield on Dubai’s sukuk has plunged 162 basis points this year to 4.86 percent Monday, after the United Arab Emirates and Qatar were spared the violent protests that spread across the Middle East, and Dubai World reached an accord with creditors in March.
“I view these sell-offs as buying opportunities,” Watts said.
Sukuk sales in the Gulf declined 20 percent to $1.86 billion so far this year, boosting investor demand for the debt and driving borrowing costs in the region to the lowest in almost six years, according to the HSBC/NASDAQ Dubai GCC U.S. Dollar Sukuk Index. The extra yield investors demand to hold Gulf debt over the London interbank offered rate dropped 28 basis points this quarter to 292 Friday, the data show.
The yield on Bahrain’s 6.247 percent Islamic bonds maturing June 2014 fell 11 basis points last week to 3.11 percent, extending its decline for a sixth week.
The rate soared to 4.45 percent on March 15, after protests spread to the island nation.