Qatar's bonds best performers in Aug on flight to quality

World's biggest LNG exporter forecasts its economy will expand 15.7 percent this year
Qatar's bonds best performers in Aug on flight to quality
Four of the five best-performing securities among 32 that make up the HSBC/NASDAQ Dubai Middle East Conventional Sovereign Bond Index were from Qatar
By Bloomberg
Tue 06 Sep 2011 04:49 PM

Qatar’s sovereign bonds were the best performers in the Middle East in
August as investors sought refuge from a slowing US economy and a worsening
debt crisis in Europe.

Four of the five best-performing securities among the 32 that make up the
HSBC/NASDAQ Dubai Middle East Conventional Sovereign Bond Index were from Qatar.
The fifth was from Abu Dhabi. The total return on Qatar’s 6.4 percent bond due
2040 was 7.25 percent last month, according to data compiled by Bloomberg. The
JPMorgan Emerging Markets Bond Index returned 0.22 percent. US government bonds
had a return of 2.8 percent in August, the most since December 2008, according
to an index compiled by Bank of America Corp’s Merrill Lynch unit.

“There has been a global flight to quality since July as macroeconomic
conditions deteriorated in the US and Europe,” Gus Chehayeb, a Dubai-based
associate director at investment bank Exotix Ltd., said in an e-mailed response
to questions from Bloomberg News on Sunday. “Bond investors shifted funds into
regional sovereigns with the cleanest and strongest balance sheets, and for Middle
East-focused investors this meant a capital flight into Qatar and Abu Dhabi.”

Employment in the US unexpectedly stagnated in August, raising the odds the
world’s biggest economy will slip into recession. Political squabbling over the
US budget deficit that led to the country being stripped of its AAA credit
rating and mounting concern about a default in Europe has caused the S&P
500 share index to drop 8 percent between July and August.

Qatar, the world’s biggest exporter of liquefied natural gas, forecasts its
economy will expand 15.7 percent this year. The country projects a budget
surplus of QR22.3bn ($6.1bn) this fiscal year, and the International Monetary
Fund says Qatar will have the world’s fastest-growing economy for the second
straight year in 2011.

The default risk of Qatar and Abu Dhabi, both rated AA by S&P, climbed
less than eight basis points to 102 and 102.1 respectively, since the US lost
its AAA rating for the first time in history, according to data provider CMA.
Credit default swaps for Japan, also rated AA at S&P, the third-highest
investment grade score, rose 12 basis points to 105.44, according to CMA, which
is owned by CME Group Inc. and compiles prices quoted by dealers in the
privately negotiated market.

 “Because Qatar and Abu Dhabi are the highest quality names in the
region they’re the most sensitive to interest rate changes like US Treasury
yields,” said Abdul Kadir Hussain, who helps oversee $2bn in fixed-income
assets as chief executive officer at Mashreq Capital DIFC Ltd. in Dubai. “You
also had investors exiting higher yielding names like Dubai to get into
safe-haven trades like the Qatar sovereigns.”

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The US government’s benchmark 10-year Treasury yields declined 57 basis
points last month, the most since a 71 basis point drop in December 2008,
touching a record low of 1.97 percent on Aug. 18, according to data compiled by

European sovereign default risk rose to a record on Sunday after a report
showed employment in the US unexpectedly stagnated in August, adding to signs
the global economic recovery is weakening. The Markit iTraxx SovX Western
Europe Index of credit-default swaps insuring the debt of 15 governments rose
11 basis points to 310, surpassing a record closing price of 308 on Aug. 26.
Sovereign-debt difficulties in Europe pose a threat to the euro and financial
institutions in the region, World Bank President Robert Zoellick said in
remarks prepared for a speech in Beijing on Sunday.

The six-member Gulf Cooperation Council, which includes Qatar, Saudi Arabia
and the United Arab Emirates, of which Abu Dhabi is the capital, holds about a
fifth of the world’s proven oil reserves. Crude prices jumped more than 30
percent over the past five years. Oil tumbled 11 percent this quarter and was
trading at $84.95 as of 11:30 am in Dubai.

Both Qatar and Abu Dhabi have been spared the protests to replace autocratic
regimes sweeping the Arab world that have toppled leaders in Egypt, Tunisia and
Libya, and led to violent clashes in Yemen, Syria and Bahrain.

“Long-dated bonds performed well given how much benchmark treasury yields
dropped, so the Qatar 2030s had a decent run,” Ahmed Talhaoui, head of asset
management at Abu Dhabi-based Royal Capital said on Sunday. “High-beta names
such as Dubai witnessed a significant spread widening.”

The yield on Dubai government’s 7.75 percent bond due 2020 widened 30 basis
points to 6.78 percent in August and on the 6.7 percent bond due 2015 increased
49 basis points to 5.47 percent. The 2020 notes yielded 6.83 percent on Monday
and the rate on the 2015 securities was at 5.55 percent.

Qatar’s central bank last month cut its overnight lending rate and
repurchase rate to 4.5 percent from 5 percent. The overnight deposit rate was
cut a quarter point to 0.75 percent. The move aims to boost credit for spending
on infrastructure and real-estate projects, the central bank said.

Qatar, which will host soccer’s 2022 World Cup, exported its first cargo of
liquefied natural gas in 1996. The country reached its target of 77 million
tons of annual LNG production early in 2011, making it the world’s biggest

“If the US can come up with a strong and cohesive policy response over the
next couple of weeks, we could see a reversal in the markets,” Hussain at
Mashreq Capital said. “Otherwise the trend will continue.”


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