Strong investor demand pushes two-year development bond coverage to 284pc

TDT | Manama

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Investors poured BD568 million into Bahrain's latest government bond as the kingdom offered its highest development bond yield of the year.

The BD200 million, two-year issue carried a 7pc annual return and was covered 284pc, the strongest take-up for a development bond since January. Only Sukuk Al-Salam drew greater demand, reaching 300 pc.

The rush came even as Gulf borrowing costs rose to their highest level in four years. The average sovereign risk premium on GCC bonds climbed to 402 basis points above US Treasury yields, according to JP Morgan.

Bahrain has paid more to raise funds as that gap has widened.

The yield on two-year development bonds rose from 5.50 pc in issue 43 to 5.625 pc in issue 44, then jumped to 7pc in issue 47. That was an increase of 1.5 percentage points, or 27 pc, from the start of the year.

Demand, however, moved unevenly. Coverage fell from 172 pc in issue 43 to 114 pc in issue 44. It then rose to 210 pc for the three-year issue 45, which paid 6.25 pc, before surging to 284 pc for issue 47.

The same rise in yields was seen across other state debt.

Returns on Ijara and Murabaha Sukuk climbed from 4.68 pc to 5.52 pc, while Sukuk Al-Salam yields rose from 4.84 pc to 5.22 pc.

The yield on 91-day Treasury bills increased from 4.82 pc in the first sale of the year to 5.20 pc in July. One-year Treasury bills rose from 4.68 pc to 5.52 pc.

Across all state debt tools, yields rose by an average of about 0.8 percentage points, or close to 16 pc.

Yet higher costs did little to sap demand.

During the first seven months of the year, bids for development bonds reached about 209 pc of the sums offered. Sukuk Al-Salam were covered 213 pc, while Ijara and Murabaha Sukuk reached 192 pc. Treasury bills trailed at 131pc.

The split was clearest among debt carrying almost the same yield and term.

In July, 91-day Sukuk Al-Salam paid 5.22 pc, against 5.20 pc for Treasury bills of the same length. The Sukuk were covered 300 pc, compared with 178 pc for the bills.

One-year Ijara and Murabaha Sukuk, paying 5.52 pc, drew bids equal to 180 pc of the sum on sale. One-year Treasury bills at almost the same rate managed coverage of just 101 pc.

The gap points to stronger demand for Sharia-compliant state debt among both retail and institutional investors, even when the yield and maturity are almost identical.