Middle Eastern sovereign bonds are rallying for a second month as economic growth and cash-rich banks lure investors seeking shelter from Europe's debt crisis and the US economic slowdown. Schroder Investment Management Ltd., Abu Dhabi Commercial Bank PJSC and Fideuram Asset Management Ireland Ltd. predict the rise, fueled by Arab Gulf borrowers and Lebanon, may continue. The average yield on the region's notes declined 17 basis points, or 0.17 percentage point, this month to 4.67 percent, the lowest since November, the HSBC/Nasdaq Dubai Middle East Conventional Sovereign US Dollar Bond Index shows. In Lebanon, high yields and domestic demand for government debt is luring investors, according to Fideuram. Gulf countries "do not represent any sovereign risk given the massive surpluses they have accumulated in the past five years as a result of high oil prices," Rami Sidani, the Dubai-based head of Middle East and North Africa investments at Schroder, which oversees about $230 billion worldwide, said in an email on Aug. 16. "We don't expect yields to pick up before we see a general pick up in risk appetite." Bonds of Qatar and Abu Dhabi have outperformed notes from other emerging economies after Standard & Poor's cut the US debt rating Aug. 5. The Qatari economy may expand 20 percent this year, according to the International Monetary Fund, while the United Arab Emirates, a federation of which Abu Dhabi is the capital, may see 3.3 percent growth. Gross domestic product in the 17-nation euro area rose 0.2 percent in the three months ended in June, the worst performance since the euro region emerged from recession in 2009, EU data showed. In the US, the housing market still faces foreclosures, declining construction and falling sales two years into an economic recovery. The default risk of Qatar and Abu Dhabi, both rated AA at S&P, climbed less than eight basis points to 98 and 100, respectively, since the US lost its AAA rating for the first time in history, according to data provider CMA. Credit default swaps for Slovenia, also rated AA at S&P, the third-highest, rose 20 basis points to 170, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The yield on Qatar's 4 percent bond maturing in January 2015, the security with the highest weighting on the HSBC/Nasdaq Dubai Index, fell 19 basis points this month to 1.97 percent Thursday. The rate on Abu Dhabi's 6.75 percent bond maturing April 2019 declined 47 basis points to 3.24 percent. The six-member Gulf Cooperation Council holds about one-fifth of the world's proven oil reserves. Crude prices jumped more than 30 percent over the past five years. Saudi Arabia announced plans to spend about $129 billion, or about 30 percent of economic output, over the next several years to "appease any possibility of unrest in the region," Nomura analysts Ann Wyman and Icaro Rebolledo, wrote in the Aug. 12 note.
