ISIL Iraqi Onslaught Driving Kuwait Bond Yields Higher

Investors in Kuwaiti bonds are signaling increased concern over the crisis in neighboring Iraq as Islamist militants pursue their onslaught across the nation.

“The risk is there, an unstable Iraq will affect Kuwait,” Jassim Al-Saadoun, head of Kuwait-based Al-Shall Economic Consultants, said by phone yesterday. “People feel that we are in direct threat. Kuwaiti securities will continue to come under pressure.”

Kuwaiti corporate bonds have slumped the most in a year so far this month, lifting yields 15 basis points to 3.91 percent, according to JPMorgan Chase & Co.’s CEMBI Broad Kuwait Blended Yield index. That compares with a three basis-point increase on average for the Middle East.

Fighters for the Islamic State in Iraq and the Levant battled for territory on Iraq’s border with Jordan and Syria after capturing the northern city of Mosul earlier this month. Kuwait was invaded by the army of former Iraqi President Saddam Hussein in 1990.

While the emirate is protected by a security agreement with the U.S. and is part of the Gulf Cooperation Council, Naveed Ahmed, an analyst at Global Investment House KSCC in Kuwait, said the conflict is “sending ripples” across the region.

“There are whispers of fears regarding this conflict turning into a larger issue for the region, embroiling the GCC into an adverse geopolitical or even military muddle,” said Ahmed. “The spike in the yields could be an indicator of just that with investors seeking a higher premium for the rise in associated risk.”

Jordan, Syria

U.S. President Barack Obama told CBS in an interview yesterday that the fighting could spread to “allies like Jordan.” The militants “are engaged in wars in Syria where -- in that vacuum that’s been created -- they could amass more arms, more resources,” the president said, according to a transcript.

“There’s no direct threat to Kuwait” because ISIL is a Syrian, Iraqi phenomena, said Shafeeq Ghabra, a political science professor at Kuwait University. “Kuwait is part of the GCC and has strategic value. This, along with its agreement with the U.S. and relations at all levels, will protect Kuwait.”

Reduced Debt

The increase in Kuwaiti corporate yields follows a decline of 131 basis points on average this year through May, according to JPMorgan’s index data. The market outperformed the 67 basis-point drop for the United Arab Emirates as Kuwaiti investment companies cut borrowing. Debt owed to local banks by 92 investment companies fell 26.5 percent to 3.08 billion dinars ($10.9 billion) in the year to April, as earnings surged on fee income and asset values, central bank data show.

The latest move “could be attributed to the profit booking triggered by the rising geopolitical risk in the region,” said Mandagolathur Raghu, head of research at the Kuwait Financial Center.

The Kuwait Stock Exchange Index has dropped 4.9 percent this month.

“There is a little fear between the investors from what’s happening in Iraq,” Samer Mardini, the Dubai-based vice president of fixed income at SJS Markets, said by e-mail June 22. “I do expect further bond dumping till we see better circumstances in Iraq.”

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