Middle Eastern fixed income, the darling of regional investors during the past year, is now putting them in a state of anxiety.
The jury is out on whether demand for the region's debt, which brought a record year for bond and sukuk sales in 2012, is in danger of running out of steam amid a pullback from recent highs.
Dubai's latest 10-year sukuk is trading at a discount of 12 basis points to its par value, after a sale that analysts said was "aggressively" priced. Upon issuing, the emirate's debt returned a coupon of 3.85 per cent, lower than equivalent dated debts sold by the Italian government.
That could be the high water mark for bond sales in the region, analysts say.
"Investors are starting to worry about yield compression," said Rachel Ziemba, a director of emerging markets at Roubini Global Economics. The question is whether investors are "being paid enough for the risk they're taking on", she said last week.
Debate abounds on Wall Street and London over whether a "great rotation" from bonds into equities is taking place, as fears mount that increased inflation could cause a rise in US Federal Reserve interest rates, which could squeeze spreads on riskier fixed income.
That has done little to dissuade HSBC, the UAE's largest underwriter of sukuk debt, from declaring that this year will set a new record for sales in the Arabian Gulf of between US$30 billion (Dh110.19bn) and $35bn.
The total raised through sukuk sales last year was $21.2bn. "We will see a number of new issuers in the region who have now actually taken a hard look at this and said 'OK look this makes a lot of sense for us,'" Mohammed Dawood, managing director of debt capital markets at HSBC Amanah in Dubai, told Bloomberg News last week. "'Not only can we get the size, can we get the tenure, but potentially from a pricing perspective, there is a real cost saving and there is a cost benefit.'"
Other banks, including Coutts and Emirates NBD, are recommending clients shift from bonds into equities as returns dwindle.
So far this year, investments in Islamic bonds have disappointed. Total returns on the HSBC/Nasdaq Dubai USD Sukuk index are flat. That is better than other emerging market bond benchmarks but a far cry from the ebullience recorded on equity markets.
The MSCI World index of global equities has rallied 5.8 per cent this year, as central bankers from Japan to the United Kingdom anticipate higher inflation rates and investors bet on stocks for growth.
One country creating real concerns is Qatar, where domestic inflation rates last month rose to 3.4 per cent year-on-year.
For international investors benchmarked against US or euro-zone inflation, that is unlikely to create any concerns. But Qatari investors are now receiving a negative yield in real terms on holdings of the vast majority of government debt - as well as many debts issued by companies including Qatar National Bank and Qatar Telecom - meaning they are effectively paying the government to lend it money.
That makes generating returns from Qatar extremely difficult as inflation accelerates, said Mark Watts, the head of fixed income at the National Bank of Abu Dhabi.
To counteract domestic inflation "you would have to be investing in a BBB-style portfolio", he said, referring to credit ratings on the cusp of "junk" bonds. "But all the big issuers in Qatar have government involvement," he said, which limits potential yields.
In the meantime, fears over the euro-zone sovereign debt crisis could rear their head after GDP data released on Thursday showed the currency bloc's economy shrank more than expected during the fourth quarter.