Gulf bonds will likely see a further sell-off when trading resumes on Monday, in response to the S&P's downgrade of the United States' credit rating last week and increasing concerns over the health of the global economy.
Regional bond prices had already begun to ease on Friday in response to the massive volatility on global equities markets on the previous day.
Bond prices in the Gulf Arab region had rallied in recent weeks as mostly regional investors flocked to familiar territory in the face of global volatility.
But the impact of last week's markets volatility was already apparent in widening regional spreads at the back end of last week.
The spread on HSBC/Nasdaq Dubai's Middle East bonds and sukuk index widened about 30 basis points in the last three days alone.
Bids on Dubai's five year CDS widened to 340.67 basis points on Aug 5 from 321.67 points on Aug 1, Markit data showed.
"I think the long-term picture for fixed income is still good, but near-term you should see some profit-taking," said Akram Annous at Al Mal Capital in Dubai.
The bid price on Qatari Diar's $2.5 billion 2020 bond eased to about 106.0 on Aug 7 from 107.0 on Aug 4, according to Thomson Reuters data. The bond, issued by the real estate arm of Qatar's sovereign wealth fund had rallied from a bid price of 102.0 since June 27.
Yield on Dubai's $750 million 2020 sovereign bond issued last year has risen to 6.5 percent from about 6.363 percent on Aug 4.
With the downgrade in the US rating by S&P and slow progress in containing the eurozone debt crisis, spreads are expected to widen further but investors could be lured back to certain regional names once markets are more stable.
"We are seeing an initial knee-jerk reaction (to the US downgrade) in the Middle East credit markets but as the dust settles, global investors will start to look for opportunities as they have to park their cash somewhere," said Chavan Bhogaita, head of markets strategy at National Bank of Abu Dhabi.
"The high-quality sovereign credits, blue chip GREs and top tier financials in the region could find themselves beneficiaries of the 'flight to stability' type trade given the ongoing uncertainty in the more developed global economies."
Regional investors, mostly banks flush with liquidity, could also help prop up local bond markets.
"It appears to be a two-tiered market. Shorter-dated local bonds and sukuk should hold up relatively well because of local demand," said Nick Stadtmiller, fixed income analyst at Emirates NBD.
"But longer-dated bonds will have a harder time, as international investors are key buyers of this paper."
In response to the US ratings downgrade, Gulf states - whose economies are pegged to the dollar except Kuwait - reiterated support for the currency.
The UAE, the second largest Arab economy, said on Sunday it saw no credit risk to investing in US treasuries, while Oman said it would make no "irrational" decisions.
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