Qatar, the world’s fastest growing economy, and Abu Dhabi are luring bond investors keen to cut their investment in markets closer to Europe’s debt crisis.
The average yield on Persian Gulf bonds fell three basis points, or 0.003 of a percentage point, this month to 4.719 percent yesterday, 12 basis points off the lowest ever level reached on Aug. 2, the HSBC/Nasdaq Dubai GCC Conventional US Dollar Bond Index shows.
Yields on Qatar’s sovereign dollar-denominated bonds touched record-lows last week. Sovereign bond yields of Hungary, a European Union member, had their biggest weekly jump since April and Polish debt yields also rose, according to data compiled by JPMorgan Chase & Co.
“I have started in the last three weeks to reduce my exposure to Eastern European countries” and buy into “fundamentally strong countries with solid public finances,” Sergey Dergachev, who oversees $8.5 billion in emerging-market debt at Union Investment Privatfonds in Frankfurt, said by e- mail yesterday. Dergachev said he has been buying Qatar and Abu Dhabi bonds.
The European Central Bank bought debt of Spain and Italy yesterday in their latest bid to ease the area’s debt crisis and prevent financial contagion. Standard & Poor’s downgrading of the U.S. by one level from its AAA credit rating also spurred concern among investors about the health of developed economies. The average yield on European sovereign debt rose the most since June on Aug. 5.
Divergent Yields The yield on Qatar’s 6.55 percent sovereign bonds due in 2019 dropped three basis points, or 0.03 of a percentage point, last week and touched 3.529 percent on Aug. 4, the lowest since the debt was issued in April 2009. The yield rose six basis points yesterday to 3.647 percent.
The yield on Hungarian bonds jumped 30 basis points, the biggest weekly jump since the five days ended April 29, and Polish debt yields climbed 11 basis points, according to data compiled by JPMorgan Chase & Co. The yield on government bonds of Russia, which counts Europe as its biggest trading partner, rose 14 basis points over the past two days.
Propelled by natural gas exports, the Qatari economy may expand 20 percent this year after growing 16 percent in 2010, the International Monetary Fund said in April. Abu Dhabi, the capital of the United Arab Emirates, holds 7 percent of the world’s proven oil reserves. Crude, while down 14 percent in August on concern a global recession will slash energy demand, will rebound by the end of the year, according to analysts.
Daniel Broby, the London-based chief investment officer at the Silk Invest Ltd, said his firm hasn’t sold any of its Middle East debt holding. Silk Invest has cash that it “will soon put to work,” he said in an e-mailed response to questions yesterday. The global turmoil “makes our markets look more interesting because in aggregate, the GCC and frontier markets in general have greater reserves than outstanding debt.”
‘Safe Haven Papers’ The extra yield demanded by investors to hold European bonds instead of U.S. Treasuries surged 54 basis points this month to 319, according to JPMorgan Chase & Co’s EMBI Global Index. Middle Eastern debt spreads on average climbed 51 basis points to 402, the data show.
Bonds from the region and North Africa are attracting capital from advanced countries, said Rawad Hakme, the Dubai- based co-manager of fixed income at the U.A.E. unit of EFG- Hermes Holding SAE, the biggest publicly-traded Arab investment bank.
“Investors will continue to overweight emerging markets in general, and the Middle East and North Africa in particular, given the weaker fiscal positions in developed markets,” Hakme said by e-mail yesterday. “The safe haven papers are in Abu Dhabi and Qatar.”
The yield on Qatar’s 5.25 percent dollar notes maturing in January 2020 touched a record low last week at 3.686 percent, according to data compiled by Bloomberg. The yield rose two basis points yesterday to 3.808 percent. The yield on Abu Dhabi’s 6.75 percent bonds maturing in April 2019 gained 13 basis points yesterday to 3.72 percent, after hitting an all- time low of 3.655 percent on Aug. 4, the data show.
Oil Spike The rally may only be sustained should oil prices rebound, said Anthony Simond, who helps manage $7 billion in emerging- market debt, including Qatari sovereign bonds, at Aberdeen Asset Management in London.
“The price of oil makes a lot of difference, so if we see another spike there, that’s obviously good news for the likes of Qatar and Abu Dhabi, and they could see further inflows,” he said.
The oil price needed for Persian Gulf countries to fund budget expenditure has more than doubled since 2006 to $77 a barrel, according to Deutsche Bank AG. The increase has been driven by rising public spending aimed at deterring the pro- democracy uprisings that swept parts of the Middle East this year, leading to the ouster of the presidents of Tunisia and Egypt.
Crude Recovery Oil tumbled as much as 7.7 percent yesterday to $80.17 a barrel, the lowest intraday level since November. Prices plunged 9 percent last week.
Analysts are predicting a recovery, with prices in New York rising to $100 a barrel in the fourth quarter, according to the median of 32 estimates compiled by Bloomberg.
Credit default swaps insuring Qatari government debt against default for five years climbed one basis point yesterday to 97, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Abu Dhabi default swaps advanced one basis point yesterday to 96. Default swaps for Poland jumped 43 basis points last week to 210, and gained six basis points yesterday to 216, the highest level since 2009, CMA data show. Hungarian contracts have surged 102 basis points since Aug. 1, to 412 yesterday.
“Eastern Europe suffers most from euro zone jitters, whereas the GCC is both macroeconomically solid and its bonds have strong local sponsorship,” Union Investment’s Dergachev said, referring to the Gulf Cooperation Council. “I have not sold any bonds out of the GCC and I have purchased in Asia and the GCC both conventional bonds and sukuk,” he said.