UAE and Gulf investors pour money into US Treasuries as yields hit 20-year high

Investors in the UAE and Gulf region are showing strong interest in bonds as the yield on the 10-year US Treasury hits 5 per cent, its highest level since 2007.

Trading industry executives said the appetite is global and includes the Gulf. However, amid an uncertain global geopolitical situation, analysts urged investors to diversify and keep some cash in reserve as the US Federal Reserve raises rates and geopolitical tensions lift oil prices.

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Wael Makarem, financial markets strategist lead at Exness, said there is significant interest worldwide in bonds yielding 5 per cent, “including UAE and GCC, of course”. He said, “previously, investors didn’t have this opportunity to get a return from the bond market since rates were near zero, but now rates are around 5 per cent on 10-year [Treasuries]. This is a decent return where investors can really now diversify across bonds, stocks and other assets”. He said money on the sidelines is looking to lock in returns of 5 to 6 per cent on A-grade bonds, with riskier issuers offering a few percentage points more.

The 10-year yield reached 5 per cent in the current quarter, he said, a level not seen since 2006 or 2007. The main downside is price volatility if the US Federal Reserve keeps tightening. However, Makarem said any peace deal or negotiations that push oil prices down would ease inflation and rate-hike expectations, lifting bond prices. The US Federal Reserve hiked interest rates in mid-September by 25 basis points for the first time in three years, taking them to a range of 3.75 per cent to 4 per cent, in order to contain inflation in the world’s largest economy.

Buyers ‘tipping a toe in the water’

Ahmad Assiri, research strategist at Pepperstone, said heavy inflows would not move the market because US Treasuries are by far the largest and most liquid bond market in the world, with large banks and institutions trading every day. He said buyers are far fewer than the market would need to push yields down. Many are “tipping a toe in the water” and building positions gradually, he said.

Assiri described Treasuries as an attractive source of income, particularly for people in their 30s and 40s planning their cash flows. The two-year, five-year and 10-year yields are within about 10 basis points of each other, which he called “almost an arbitrage”.

The five-year real yield, which accounts for inflation, is about 2.3 per cent, he said, adding that diversification is key in these times.

Ross Maxwell, chief strategy officer at VT Markets, said higher bond yields largely reflect expected US rate rises and that central banks have clearly shifted towards fighting inflation. He said the Fed’s hawkish stance could slow global oil demand, which is why prices have eased slightly from recent highs.

He identified three main risks: geopolitical escalation in the Middle East could further disrupt oil supplies; tech-led equities are outperforming, but higher borrowing costs could weigh on earnings and infrastructure spending, potentially triggering a correction; and continued rate rises could hurt global economic growth.

Maxwell advised investors, including small retail investors, to understand their time horizons and risk appetite and to know the risks facing each asset class.

“Keep some liquidity available to be able to keep you more flexible when these sorts of risks come about,” he said.