GCC bonds could see further yield spread compression in the coming months, despite low oil prices, as global investors hunt for yield and a spate of redemptions frees up cash for reinvestment in the market, according to an expert.

The GCC’s fixed income can be categorised broadly into two areas – high-grade issuances and high-yield issuances, said Ram Mohan, portfolio manager at Invest AD - Abu Dhabi Investment Company.

The high-grade issuances include the sovereigns and quasi-sovereigns of Abu Dhabi, Saudi Arabia and Qatar, while high-yield issuances include the riskier sectors such as real estate and oil and gas exploration, he said.

As a bloc, the GCC has extremely high levels of financial reserves, with Abu Dhabi and Saudi Arabia having around $750 billion of reserves each while Qatar has around $250 billion.

These large reserves make it easier for GCC sovereigns and related entities to raise finance, as investors realise these countries are extremely unlikely to default.

Abu Dhabi, Qatar and Saudi Arabia enjoy the highest ratings, and investors appear to be comfortable with these credits, even with lower oil prices raising the probability of higher budget deficits across the region, said Mohan.

Qatar, Bahrain, Saudi Arabia have all traded in a tight range over the last few months and yield spreads remain tight, he said.

Dubai bonds, which is a good mixture of sovereigns, quasi-sovereigns and corporates, have proven fairly volatile. But as the emirate continues its recovery from the 2008-2009 crisis, investors will be attracted to the higher spreads available, he stated.

At a time when quantitative easing by the European Central Bank has created negative yields in many European countries, global investors are seeing value in the Middle East markets, especially in sovereign and quasi-sovereign bonds.

Another driver for the market is the fact that this year will see redemptions for bonds issued in the 2008-2010 period, which could lead to further yield spread compression.  

About $18 billion to $20 billion of maturities are being expected and the regional banks, sharia-compliant fund managers and pension funds that hold these bonds are expected to put their cash back into fixed income markets.

Most of these investors have a mandate to invest back into the GCC region, he added. - TradeArabia News Service