Are investors fishing for Gulf bonds near the market top?

Foreign and local investors are snapping up bonds issued by Gulf companies and governments. Yesterday Qatar announced a $7 billion bond sale, the biggest and most tightly priced to date.

But are investors buying at the top of the bond market? Yields are exceptionally low. Perhaps they should really be looking at Gulf stock markets for value, or be preparing to do so if local markets have a correction after the long rally since February.

Qatar leads again

Qatar yesterday sold $3.5 billion in five-year bonds at 185 basis points above US treasuries; $2.5 billion of 10-year bonds at 195 basis points over US treasuries; and $1 billion of 30-year bonds paying 215 basis points above T-bonds.

This appears to be a question of taking the money while it is available. Qatar hardly needs extra cash with its huge hydrocarbon revenues but it can press ahead with its substantial economic diversification program all the more quickly with additional funds.

Of course, Qatar has the best credit. A few weeks ago Dubai paid 406 basis points above US treasuries for five-year bonds. But that rate was a massive improvements on the price of debt earlier in the year for Dubai.

Abu Dhabi paid 230 basis points over US treasuries for the Tourism and Development Company’s $1 billion sukuk recently.

But investors seeking the perceived safety of bonds linked to the price of US treasuries could be in for a nasty shock. At some point the US Government is surely going to have to put interest rates back up again, perhaps to contain inflation caused by all its money printing.

When interest rates rise then fixed-coupon assets like bonds automatically fall in value. That will be as true for a bond issued in Doha, Dubai or Abu Dhabi.

Coming bond crisis

If you look back into history then there has never been a financial crisis that did not end with a crash in the bond market. Why should it be different this time?

All it takes is a sudden exodus from US dollar assets and the Fed would be forced to increase interest rates to support the currency. It is inconceivable that all the money printing going on at the moment is not going to devalue the US currency at some point, and by a far greater amount than up to now.

That is why gold and silver are so popular at the moment, or even US cash balances. US cash might pay near zero interest rates but there is not the same capital risk as holding bonds. Investors may learn about the capital risk of bonds very soon.