MENA dollar bond yields expected to rise: Capital Economics

Dollar bond yields have risen across the MENA region over the past month and are expected to rise further, as the Fed is likely to raise interest rates again, this time by more than most expect.

This will push up underlying Treasury yields to around 3.50 percent by the end of 2018, Capital Economic said in a recent report.

“If oil prices drop back, geopolitical concerns linger and appetite for risky assets globally deteriorates as we expect, spreads are likely to widen further,” it added.

Dollar bond yields in smaller MENA economies, such as Lebanon, rose by as much as 45 basis points (bp), while in Bahrain and Saudi Arabia it only rose by 5-15 bp.

The 10-year Treasury yields have jumped by 20bp, or over 3 percent, for the first time since 2014, accompanied by a general widening of spreads over US Treasury yields.

As oil prices surge hitting $75 per barrel, there is growing concern over fragile balance of payments positions in Tunisia and Lebanon. Large current account deficits are likely to widen.

If oil prices remain at the current levels, the Gulf region’s economies will be boosted with as much as $135 billion (8.5 percent of GDP). For Saudi Arabia, the general trend has been for higher oil prices to come alongside a narrowing of dollar spreads.

Meanwhile, the widening of dollar bond spreads appears to reflect geopolitical tensions in the region, with concerns mounting on whether US president Donald Trump would pull out of Iran nuclear deal. If this happens, that could prompt Tehran to stoke tensions in Yemen, Syria and Lebanon.

“At the same time, spreads are likely to widen further. If we are right in expecting oil prices to drop back to around $55 per day by the end of next year, this is likely to cause dollar bond spreads in the Gulf to widen,” the firm said.

In contrast, dollar bonds are likely to perform relatively well in Egypt, as the sharp devaluation of the pound in late-2016 has supported an improvement in the current account deficit.