The United Arab Emirates is benefiting the most among higher-rated borrowers in emerging markets as a plunge in US Treasury yields drives a rush into safety.
Investors positioning for global equity losses, a slowdown in US growth and easing by the Federal Reserve sent AA-rated bonds in the Bloomberg EM Sovereign Total Return Index, the highest quality segment, to the biggest gains among rating categories in August. Within the group, UAE bonds posted the best performance.
That sent the country’s federal securities as well as those issued by individual emirates to a fourth successive monthly advance, the longest since 2021. The bonds have handed investors a 8.1% return since the end of April, beating 55 of their 70 peers in the emerging-market gauge including many high-yield names.
The UAE has arrived at a sweet spot as one of safest emerging markets when global yields are headed south and investors’ risk aversion is growing. Money managers are looking for countries with political and financial stability to ride out the rest of the year, which could be turbulent amid softening US data and noise relating to presidential elections.
“While the rally has come on the back of large moves in US Treasuries, the appeal of the UAE federal government as well as the emirates comes from very strong fundamentals,” said Fady Gendy, a fixed-income portfolio manager at Arqaam Capital in Dubai. “Investors like the combination of twin surpluses, FX reserve accumulation, lack of political noise and a supportive local bid.”
The UAE enjoys positive balances on both its budget and external accounts. It’s projected to end 2024 with an 8.8% current-account surplus and a 4.7% budget surplus, according to Bloomberg surveys. Moderate inflation, low unemployment and gross-domestic-product growth moving closer to 4% per year complete the economic picture.
Given that financial strength, the nation and its individual governments wouldn’t need to issue debt, but still do so to “stay relevant” in the market and maintain a yield curve, Gendy said.
The UAE government has enjoyed a boom in the past few years thanks to high oil and natural gas revenues. It’s one of the world’s richest countries and among just a few to manage over $1 trillion in sovereign-wealth funds.
Scarce Issuance
Bond issuances are rare, with the federal government selling only its fourth eurobond ever in June this year. Abu Dhabi, the capital, sold $5 billion of debt in April. No more bond sales are likely this year, Gendy said.
“That brings the advantage of scarcity,” Gendy added.
Yet, money managers say the nation’s bonds remain vulnerable to moves in US yields as spreads are already tight and the outlook for emerging markets as a whole depends on the varying expectations around Fed policy.
“I am still positive the name but the rally should fade,” said Guillaume Tresca, global EM strategist at Generali Asset Management in Paris. “US rates have rallied too much and so the risk is to see some upward correction for US rates. So, even if the UAE bonds can outperform on a spread basis, US rate rebound may dampen the total return.”
Beyond the rates turbulence, however, UAE bonds remain attractive to investors thanks to their credit quality, Tresca said. Sound balance sheets should support the federation and Abu Dhabi, he added. Some idiosyncratic factors may also help at the margins, such as the real estate boom in Dubai.
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