The GlobalCapital Podcast
The Gulf’s Banks Get Ready for Recession
Why It Matters
Understanding how sub‑sovereign bonds are performing offers investors a safe‑haven alternative when sovereign markets tighten, and the regulatory shifts could reshape the covered‑bond landscape, affecting both funding costs and investment opportunities. The episode is timely as banks in the Gulf face rising funding costs and global markets navigate heightened geopolitical risk, making insights into issuance strategies and new policy frameworks highly relevant for investors and policymakers.
Key Takeaways
- •Sub‑sovereign bonds outperformed sovereigns despite Middle East conflict.
- •Issuance spanned 2030‑2036 curve, offering 3%+ yields.
- •ECB approved blockchain covered bonds as euro‑system collateral.
- •Proposed EU mortgage guarantee could boost pan‑European covered bond issuance.
- •Risk weighting for EU covered bonds may fall to 5%.
Pulse Analysis
The sub‑sovereign and supranational bond market proved resilient in March, with issuers such as BNG Bank (€1.25 bn ≈ $1.35 bn) and New Zealand’s local government fund (€500 m ≈ $540 m) pricing deals across the 2030‑2036 curve. Investors chased the higher yields – many above the historic 3 % benchmark – while the sovereign segment lagged, underscoring a flight‑to‑quality shift toward well‑rated public‑sector issuers despite heightened Middle‑East volatility.
Regulators are also reshaping the covered‑bond landscape. The European Mortgage Federation and European Covered Bond Council have tabled a pan‑European mortgage‑guarantee scheme, aiming to harmonise national guarantees and potentially expand issuance capacity. Meanwhile, the ECB’s new rule permits blockchain‑based covered bonds held by central securities depositories to serve as euro‑system collateral, a move that could accelerate digital‑bond adoption. A parallel proposal to cut risk‑weightings for EU covered bonds from 10 % to 5 % would further enhance their attractiveness to banks seeking capital‑efficiency.
For Gulf banks, rising global yields and geopolitical uncertainty are tightening funding windows. Higher borrowing costs, reflected in widening spreads, compel issuers to front‑load financing in early 2024, while April’s calendar faces Easter holidays and central‑bank meetings that may fragment market liquidity. Nonetheless, the continued demand for high‑quality public‑sector debt and the prospect of regulatory incentives suggest that, even amid recession fears, Gulf banks can tap a still‑robust covered‑bond market for cheaper, longer‑dated funding.
Episode Description
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◆ Middle East capital securities will need to be refinanced ◆ Supranationals, agencies and municipalities have had a good war ◆ New ideas to promote covered bonds
The central group of bond issuers in the Middle East are the banks. They are well capitalised, with clean balance sheets and often high credit ratings. But none has come to the market since the war began at the end of February.
With fighting raging and a recession predicted, banks’ secondary spreads have widened, especially on the large quantities of subordinated capital they have issued.
That is manageable, and the banks can stay out of the market for a while. But at some point they will need to return — assuming they stick to their word and call capital bonds at the first opportunity.
Where are the safe haven assets? US Treasuries and Bunds are the obvious ones, but the war has made them sell off too, as investors price in rate rises. One market that has stayed remarkably resilient is non-sovereign public sector bonds.
Despite all the noise, investors and issuers have remained calm throughout March, continuing to do deals at sensible spreads — and April could be busy.
Covered bonds rely on a web of regulation — not just the laws that establish them in many countries, but rules governing how much capital banks have to hold against them and how they can use them for repo funding.
Several major regulatory changes are in the works at once, including on risk weightings, cross-border equivalence and blockchain. And the industry has an idea of its own — a pan-European mortgage guarantee.
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