What are local currency T-bonds and how can they boost UAE's capital markets?

The government plans to raise as much as $2.45bn from T-bond sales to help diversify financial resources

The UAE plans to auction its first T-bonds in May. Silvia Razgova / The National

Related: UAE launches dirham treasury bonds with an issuance size of Dh1.5bn

The UAE will start selling dirham-denominated treasury bonds with a benchmark size of Dh1.5 billion ($400 million), as the Arab world’s second-largest economy looks to deepen and broaden its financial markets by developing the local currency bond market.

The government plans to raise as much as Dh9bn from bond sales that will help in diversifying its financial resources and meeting its financing needs in local currency, the UAE's Ministry of Finance said in a statement on Tuesday.

The move will help in increasing the dirham's attraction and its value within the GCC currencies. It will also provide international investors, funds and financial institutions another avenue of investment in the UAE, boosting foreign capital flows into the country as part of its capital markets development plan.

A proposed schedule of auctions on the finance ministry's website shows planned T-bonds will have different tenors, ranging from two to 10 years in the short-to medium-term.

The National explains the difference between bonds and T-bonds; why the UAE is selling dirham-denominated paper; and the schedule of proposed auctions this year.

What is a bond?

A bond, also known as a security, note or paper, is a financial instrument that represents a sum loaned by an investor to a borrower, which is typically a corporate entity or a sovereign. Companies, governments and other financial institutions raise funds by selling these fixed-income instruments to investors. Proceeds can be used for financing projects, boosting capital buffers or for paying existing debt, according to online financial encyclopaedia Investopedia.

They have different maturities, or tenors, and a fixed date at which the principal amount loaned by bondholders or creditors is repaid. Borrowers or issuers, as they are known, pay variable or fixed-interest payments according to the covenants of the bond.

What is a local currency treasury bond?

T-bonds are fixed-rate government debt securities that pay semi-annual interest payments until maturity, which could be short-term, as well as long-term, between 10 and 30 years. They are also considered relatively risk-free as they are sold by sovereigns.

Why is the UAE issuing bonds in local currency?

The UAE raised $4bn last year through the issuance of multi-tranche sovereign bonds, marking the first time it issued bonds at federal level. The sale of T-bonds in dirhams will bring the UAE in line with other countries in the six-member economic bloc of GCC that already issue debt securities in local currencies.

In January, the UAE Cabinet announced the country’s public debt strategy, which includes the development of its local currency bond market.

“Issuing the T-bonds in local currency will contribute to building a local currency bond market, diversifying financing resources, boosting the local financial and banking sector, as well as providing safe investment alternatives for local and foreign investors,” said Mohamed Al Hussaini, Minister of State for Financial Affairs said on Wednesday.

“This issuance will also help build the UAE dirham-denominated yield curve, thereby strengthening the local financial market and developing the investment environment.”

What is the schedule of the bonds auction?

The T-bonds will be issued with varying tenors of two, three and five years in an initial phase, which will be followed by a 10-year deal in the medium term. The first sale is due in May for two- and three-year notes. There will be auctions in June, August and October for the same tenor T-bonds, according to the schedule of auctions.

Investors will be able to buy two-year notes as well as five-year papers in a September auction. Three- and five-year bonds would be sold in December, the scheduled showed.

These securities will be auctioned and traded through Bloomberg’s Auction System and settled through a local platform, compliant with international standards, built and operated by Euroclear Bank, the ministry said.