Dubai and Abu Dhabi’s rapidly declining CDS spreads

Both Dubai and Abu Dhabi CDS spreads have see a rapid decline since peaking at the middle of January 2009. Through increased involvement from the UAE Federal government to support its local entities, both in Abu Dhabi and Dubai, the cost of insuring sovereign debt in these two cities have collapsed to96 and 295 today, respectively.

When looking at quasi-sovereign Dubai credit, we see that similar rated government backed Asian bonds are trading at higher valuations when compared to key Dubai Inc. names - granted that they enjoy lower CDS levels. So, if you think Dubai's CDS spreads could narrow further (as I do), we could see a further contraction in yields from current levels – maybe as much as 200 bps – 250 bps?

Industrial Bank of Korea - 5/12 maturity, 4.55 % yield, A2 rating, CDS levels at 103.6

Petronas Sukuk - 8/14 maturity, 4.317% yield, A1 rating, CDS levels at 78.5