Global investors are buying up Abu Dhabi and Qatar government debt as a haven against tumbling stock markets, pushing yields on the bonds to historic lows.
Abu Dhabi Model Economies: Read the National's exclusive series on the 2030 vision
Abu Dhabi eyes Irish lessons for its vision
Ireland's economy has taken a beating during the financial crisis, but the country's development model is still one Abu Dhabi and other Gulf countries are looking at carefully.
[ read article ]
A textbook example of how to make a financial hub work
Ireland has made major investments in financial services, and has attracted some of the biggest banks in the world. Its success stands as perhaps a textbook example of how to develop a financial hub.
[ read article ]
How to impress a client - have the PM speak on your behalf
Ireland has put huge amounts of money and effort behind growing its small businesses. The government-led push has helped make thousands of homegrown companies successful and given them a lasting foothold in the global economy.
[ Read article ]
The trend has been building for weeks now, sending some Gulf government bonds to their lowest-ever yields. The plunge also marks a sharp reversal of high yields seen when the government-owned group Dubai World announced a debt repayment standstill two years ago. Bond yields move inversely to prices.
"People are fleeing to safe assets, and Qatar and Abu Dhabi bonds are seen as safe assets," said Abdul Kadir Hussain, the chief executive of Mashreq Capital in Dubai.
Abu Dhabi government bonds maturing in 2019 are yielding about 3.2 per cent, down from 4.8 per cent six months ago. Qatari bonds that also mature in 2019 are yielding 3 per cent, less than half of their 6.5 per cent yield when they were first sold in 2009.
Those yields come as investors worldwide ditch stocks in favour of gold and government bonds that are regarded as more secure.
Stock markets across Europe have shed more than 20 per cent of their value in the past month amid renewed concern about government debts and worry that a recession will recur. Gold on Friday reached a record high of US$1,878 an ounce. Another factor driving investors into Middle Eastern bonds, investors say, is that their yields are still higher than those on US or UK government debt, giving Gulf government bonds the added prospect of higher returns.
While 10-year US Treasury bonds are yielding about 2 per cent, comparable bonds in Qatar and Abu Dhabi are putting up 3 per cent yields. The same dynamic holds up across other maturities, with Abu Dhabi's five-year bonds yielding 1.4 per cent versus five-year US treasury yields under 1 per cent.
"When you look at these yields in terms of absolute yields, it doesn't look very attractive, but when you look at it from a relative standpoint it becomes an easy and safe place to park your cash," Mr Hussain said.
Bond yields have declined not only in government bonds but also in debt issued by state-controlled companies.
Mubadala Development, a strategic investment company owned by the Abu Dhabi Government, has seen yields on its 10-year bonds sink to 3.9 per cent from 4.9 per cent in March. Yields on 10-year bonds sold by Abu Dhabi's International Petroleum Investment Company are at 4.5 per cent, their lowest level since they were issued last year.
The trend has taken hold to some degree across the Middle East. The average yield on Middle Eastern government debt has dropped 0.17 percentage points this month to 4.67 per cent, according to Bloomberg News figures, reaching its lowest point since November.
Lower yields can stimulate new bond sales, since they serve as a guideline for the interest rates investors are demanding. Lower interest rates mean cheaper borrowing for companies and governments.
Michael Grifferty, the president of the Gulf Bond and Sukuk Association, said lower yields were "a plus" for the region, adding that he expected a rise in regional bond sales this year. He said, however, it would probably take a more prolonged period of low yields to invigorate the market.
"The yields have an effect, but we would need sustained low yields, more stability and factors that go well beyond the region," Mr Grifferty said. "People have to make plans and follow through on them, but you can't just jump into the market and be ready at any opportunity. You can if you're ready, but financing plans need time."
Abu Dhabi and Qatar have some of the region's highest credit ratings, and they are seen as safe because of their large reserves of oil - and the huge oil savings they could tap in case of crisis. Abu Dhabi and Qatar both have "AA" ratings from Standard & Poor's at a time when fear is running high about sovereign debt in the wake of the agency's recent downgrading of America's top-tier "AAA" rating.
Many observers expect the trend of lower yields to continue as long as global uncertainty persists. But Mr Hussain said there was a risk that yields could go back up if world markets went into a tailspin and investors started to withdraw money from emerging-market bond investment funds.
"If emerging market funds start to see outflows, then you will have a situation where some of these [Middle Eastern] bonds will be some of the easiest for these bond managers to sell because they are liquid and there is demand for them," he said.
