All is not well in Gulf credit markets - until now, the darlings of overseas investors - with returns falling and investors increasingly pushed towards riskier assets in search of returns.
Highly rated Gulf bonds losing lustre as yields fall
Qatar and Abu Dhabi government bonds, the former favourites of Middle East fixed income, are not what they used to be.
As recently as a few months ago, investment banks were recommending that the highly rated bonds were a good substitute for "safe" British, American or German sovereign debts, which were yielding a paltry return rate.
The high demand for Arabian Gulf credit has underpinned regional equity markets throughout the past year of global turmoil.
"Even with all of what's happened in Europe and question marks over the global economy, Gulf credits have been marching higher every day," said Sherif El Zeneiny, the regional head of fixed income trading at National Bank of Abu Dhabi.
The most highly rated government debts in the Gulf have followed, with some yields turning negative once accounting for inflation.
This means that investors are effectively paying to invest their money in government securities, as has happened in western bond markets.
The Abu Dhabi Government's five-year bonds maturing in 2014 were yielding 0.33 per cent on Friday, while ten-year bonds coming due in 2019 yielded 2.1 per cent.
Meanwhile, Qatar's 10-year bonds yielded 2.2 per cent.
But consumer price inflation for the UAE rose at an annualised rate of 1.1 per cent last month, while consumer prices in the United States rose by 2 per cent in September compared to a year ago - further depressing real yields for overseas bond investors in dollar-denominated Gulf debt.
But most of the potential gains have now been priced in and investors need to search harder for returns, analysts from Barclays wrote in a research note.
That means looking for riskier options, such as Bahraini government debt.
"We recommend moving down the risk spectrum to look for potential outperformance," the Barclays report said. "This trade entails moving from sovereigns into corporates, but also means that we take a tactically more constructive view on Bahrain."
Barclays also recommends debts from Dubai Holding Commercial Operations Group and other UAE corporate credits such as Dewa.
Qatar's funding requirements for the 2022 Fifa World Cup mean that it would likely be forced to issue new bonds, Barclays said, which would likely put pressure on existing notes.
With $30.9 billion (Dh113.49bn) worth of bonds and sukuk sold so far, this year has been the most active year for bonds in the Gulf since 2009 and the best year for regional sukuk sales on record.
Fears of a "bubble" in global bond markets may play out during the next 12 months, said Gary Dugan, the chief investment officer at Coutts for Asia and the Middle East.