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Gulf bonds enjoy best month despite oil slump


NEVER mind the renewed slump in oil, the global hunt for high-grade dollar debt made August the best month on record for Gulf bonds.

Staring down almost US$17 trillion of negative-yielding bonds worldwide, money managers were drawn like never before to a region whose average sovereign credit rating is A+, on a par with China, Chile and Ireland.

Bonds from all six of the Gulf Cooperation Council nations included in a Bloomberg Barclays index advanced in August, with securities from Saudi Arabia and Qatar leading.

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There's a "flight-to-quality trade within emerging markets", said Mohammed Elmi, a London-based money manager at Federated Investors UK, adding that the rally in US Treasuries has provided a tailwind to high-grade Gulf sovereign debt. "It is only natural to trade up the quality curve during these volatile times." The bonds returned 3.5 per cent in August, a sizable gain when compared to an almost flat month for dollar securities across developing nations.

The gradual inclusion in JPMorgan Chase & Co's emerging-market indexes has helped, with more investors worldwide mandated to take positions in the region's bonds. That's helped sideline concerns over Brent crude's 7.3 per cent slide, which sent the commodity well below most Gulf governments' breakeven prices.

But that may change. "If oil prices continue to decline or stay low, credit fundamentals in the region will deteriorate," said Abdul Kadir Hussain, the head of fixed-income asset management at Dubai-based Arqaam Capital. "At some point that has to come through spreads." For now, he favours the longer maturity bonds of Abu Dhabi and Saudi Arabia.

Despite falling in August, the yield on Abu Dhabi's debt due 2047 was about 30 basis points higher than similarly rated debt sold by South Korea maturing in 2048.

And the yield on Saudi Arabia's 2049 bond was at 3.62 per cent, similar to Indonesia's debt, even though the Asian nation is rated four levels lower by Moody's Investors Service. "Those are good defensive names," Mr Hussain said. BLOOMBERG