A logo is on display inside an Emirates NBD bank branch in Dubai. Emirates NBD, the second-biggest bank in the country, began pan-European fixed-income investor meetings on Monday, a person familiar with the matter said last week. With negative rates on notes from nations including Germany, Austria and Finland, European investors are turning to dollar bonds from the UAE as a hedge against the tumbling euro.
Bloomberg/Dubai
For European investors seeking to maximise returns as the euro plunges and bond yields in the region turn negative, dollar-denominated debt from the Gulf is offering an attractive alternative.
European investors bought 42% of the 2.625% five-year notes UAE-based First Gulf Bank sold last month, up from 34% in November 2013. National Bank of Abu Dhabi sold 46% of similar maturity 2.25% debt last month to the region’s investors, up from 41% in 2012.
With negative rates on notes from nations including Germany, Austria and Finland, European investors are turning to dollar bonds from the UAE as a hedge against the tumbling euro. They also benefit from the weakening euro, which has plunged 12% against the dollar this year amid increasing stimulus from the European Central Bank.
“You are picking up the positive yield that you are getting had you invested in bunds and you are picking up that dollar appreciation side of things,” said Richard Kelly, head of global strategy at Toronto Dominion Bank in London. “So as long as you expect that appreciation to continue, you would be into those assets.”
The euro tumbled to $1.0596 a dollar on Wednesday as the European Central Bank embarked on purchases of sovereign debt.
TD Securities forecasts the currency will trade on par with the greenback in the third quarter and will fall below that in the fourth, according to data compiled by Bloomberg.
The UAE, like most of the six Gulf Cooperation Council countries, pegs its currency to the dollar.
European investors “believe the short-to medium-term trend will be dollar appreciation, so it makes sense for them to look elsewhere, especially the emerging markets,” Angelo Rossetto, a trader at GMSA Investments Ltd, said by phone from London on Tuesday. “It’s a chase for yield given the moves” by the European central bank, he said.
The average yield on corporate bonds in the euro area has slipped below 1% and German 30-year bond yields falling to 0.727%, the lowest since Bloomberg began collecting the data more than 20 years ago. The spread between US and German 10-year rates widened to more than 190 basis points on Wednesday, the highest since at least 25 years, the data show.
The GCC is home to about a third of the world’s proven oil reserves and a slump of almost 50% in crude prices last year will reduce government revenue. While European investors snapped up 42% of Abu Dhabi Commercial Bank bonds at a sale this month, that was less than the 66% during a one-day debt issue in September.
Bond sales from the GCC, which includes the UAE and Saudi Arabia, have climbed 21% this year to $5.3bn. Emirates NBD, the second-biggest bank in the country, began pan-European fixed-income investor meetings on Monday, a person familiar with the matter said last week.
The expected depreciation of the euro and the higher yield on US dollar-denominated debt makes the Gulf attractive for investors from the euro area, according to Sergey Dergachev, a senior portfolio manager at Union Investment Privatfonds GmbH.
“Liquidity is much better in the US dollar market than in the euro corporate bond market, and this counts for GCC bank debt as well,” Frankfurt-based Dergachev said by e-mail March 10. “The GCC is a very solid credit region” and offers diversification in a global portfolio, he said.
