Gulf Bonds Have Best Month on Record Despite the Oil Slump

(Bloomberg) -- 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 $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 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 the pack.

There’s a “flight-to-quality trade within emerging markets,” said Mohammed Elmi, a London-based money manager at Federated Investors U.K., adding that the rally in U.S. 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.”

Read More: Investors Plot Strategy After a Dizzying Month in Global Bonds

The bonds returned 3.5% 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% 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 favors 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%, 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,” Hussain said.

To contact the reporter on this story: Netty Ismail in Dubai at nismail3@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Alex Nicholson

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