x Abu Dhabi, UAETuesday 16 January 2018

Demand for Emirates bonds soars while yields shrink in Europe

Bonds issued by the Abu Dhabi and Dubai Government are enjoying high levels of demand as so-called "safe" assets in the US and Europe fall out of favour with big institutional investors.

UAE government entities are expected to tap bond markets as big institutional investors seek to avoid falling returns on western sovereign bonds, pushing demand for sovereign-linked bonds in the Emirates to record highs.

The increased interest in UAE debt could spur the Abu Dhabi and Dubai Governments to return to bond markets, said David Staples, the managing director at Moody's Investors Service. "With attractive credit spreads and credit default swaps that have certainly moved in over the past year, it's an attractive time and they'll be opportunistic."

On Wednesday last week, yields on Dubai's 10-year government debt hit a record low of 4.4431 per cent, more than a full percentage point lower than when the emirate sold the bonds to markets last year.

Last month, yields on Abu Dhabi's 10-year government debt hit an all-time low of 2.0621 per cent, more than 4 percentage points lower than the coupon originally paid. Bond yields move in the opposite direction from prices.

Increased demand comes as recent moves by the European Central Bank (ECB) and the US Federal Reserve depress the yields available on highly-rated American and German government debt, to which investors have fled in an effort to avoid the volatility of Spanish and Italian bonds.

The central banks' action had, at the very least, moderated the recent response of "muddling through" the global financial crisis, said Rob Brown, the head of global research and investment at Barclays Wealth.

"If you'd asked us a year ago, we were muddling through badly," he said. "With recent ECB moves and pronouncements by various governments … you start to move out of muddling through badly and into muddling through reasonably."

Barclays recommends exposure to equities in the United States, high-yield credit and stocks paying high dividends alongside a diverse mix of safe assets and commodities.

But Abu Dhabi government bonds are looking increasingly attractive as an alternative to western sovereign debt, Mr Brown said, as the yields on many highly-rated assets fell.

Compressed yields, in part linked to the bond-buying programmes of central banks, was compelling many Middle East investors to search instead for high-yielding debt in emerging markets, said Omar Mirza, the regional managing director for institutional asset management at Pictet and Cie.

However, the Swiss private bank is wary that the consequences of the ECB and Fed measures will be much greater in scope than previous stimulus programmes.

Western central banks had made significant progress with announcements last weekend of open-ended intervention in credit markets, said Luca Paolini, the chief strategist for Pictet Asset Management.

"The big picture is that the two major central banks in the world have shifted from one-off liquidity measures to something more structural and which is conditional on the achievement of some economic targets," he said.

"Maybe the numbers are not as big as in 2008 but it's still a change in monetary policy operations."