Egypt turmoil seen hitting Islamic bond market in near-term
DUBAI – Islamic bonds in the Gulf region hit by a sell-off sparked by Egypt’s political turmoil steadied on Wednesday but traders expect more volatility as investors fret about contagion to other Arab states.
Total returns for the HSBC/Nasdaq Dubai US Dollar Sukuk Index have fallen 0.6 percent since Jan 25. Yield spreads widened 36 basis points, indicating an increase in risk perception.
Egypt’s army told protestors it was time to help the country return to normal on Wednesday after President Hosni Mubarak said he would step down at the end of his term in September.
But unrest simmers elsewhere in the region, causing jitters in markets. Yemen’s autocratic President Ali Abdullah Saleh said he would not run for election in 2013 while Jordan’s King Abdullah replaced his prime minister following protests.
“We are at an early stage of debt capital markets recovery and understandably people may be slightly nervous,” said Rizwan Kanji, debt capital markets partner at King & Spalding.
“Markets may react to any bad news.”
Dana Gas’s five-year sukuk fell 6 percent to a low of 90 on Monday from 95.75 on January 25 but has since inched up to around 93, traders said. Abu Dhabi-based Dana has significant operations in Egypt but said it was confident of Egypt payments.
Emaar Properties, also active in Egypt, saw its benchmark Islamic bond also come under selling pressure. The bond, which launched last week, fell 2 percent to a low of 98 before rallying to about 99.25 on Wednesday, traders said.
The Gulf-based sukuk market was largely at a standstill for much of 2010. But a flurry of activity in the last quarter raised hopes that 2011 would mark a turnaround for battered Islamic bonds.
Market watchers said the decline is more a knee-jerk reaction to the uncertainty surrounding Egypt’s unprecedented protests than a sign that the sukuk market recovery will be halted.
The overall market remains stable despite the uncertainty, said Thomas Christie, fixed income sales trader at Wallich & Matthes Limited in Dubai, with some buyers even placing bids outside of the market in anticipation of improvement down the road.
“They are hoping things will come off and they can pick up bonds at entry levels they are happy with,” Christie said.
“Demand in the sukuk market, in particular, still outstrips supply so it’s just creating buying and entry opportunities if the market corrects.”
Global sales of sukuk were forecast to rise nearly 60 percent this year to more than $22 billion as economic recoveries and high crude oil prices revive the market, a Reuters quarterly poll showed.
Mashreq Capital Chief Executive Abdul Kadir Hussain said there was no market chatter about bond delays but said issuers were unlikely to launch sukuk soon.
“Much is dependent on how the Egyptian crisis plays out and how much contagion there is to the rest of the markets,” he said, adding that valuations for sukuk and conventional bonds remain attractive.