For years, bond investors had to settle for returns close to zero. That has changed, and investors in the UAE and the wider Gulf are noticing.
The yield on the 10-year US Treasury has climbed to 5 per cent, the highest level since 2007. Market strategists say the move is drawing interest from investors around the world, including those in the Gulf.
Why the yield matters
A Treasury yield is the annual return an investor earns for lending to the US government. When yields were near zero, bonds offered little reward for the risk of tying up money. At 5 per cent, the arithmetic looks different.
Wael Makarem, financial markets strategist lead at Exness, told that there is substantial interest in bonds at these yields, including in the UAE and GCC. He said money that has sat on the sidelines is now looking to lock in returns of about 5 to 6 per cent on high-grade bonds. Riskier borrowers pay a few percentage points more.
That, he said, gives investors a chance to spread money across bonds, stocks and other assets. They could not do so when rates were close to nothing.
The Federal Reserve backdrop
The higher yields follow a shift in US monetary policy. The Federal Reserve raised interest rates by 25 basis points in mid-September, its first increase in three years. That took its benchmark range to 3.75–4 per cent. The central bank’s stated aim is to contain inflation in the world’s largest economy.
Ahmad Assiri, a research strategist at Pepperstone, offered a measured view of how much the Gulf appetite matters. He said heavy inflows from any one region would not move the market. US Treasuries are the largest and most liquid bond market in the world, traded daily by big banks and institutions. In his view, many new buyers are “tipping a toe in the water”, building positions gradually.
He described Treasuries as an attractive source of income, particularly for people in their thirties and forties planning future cash flows. He also noted that two-, five- and 10-year yields sit within about 10 basis points of each other. Investors therefore earn similar returns without locking money away for a decade. The five-year real yield, which strips out inflation, is around 2.3 per cent, he said.
The risks
Higher yields do not come free. The main drawback is price volatility. If the Fed keeps tightening, existing bonds lose market value, which can hurt investors who need to sell early.
Ross Maxwell, chief strategy officer at VT Markets, pointed to three broader risks. The first is an escalation in the Middle East that disrupts oil supplies. Brent crude is trading above $100 a barrel. The second is that technology shares, which have led markets higher, could correct as borrowing costs rise. The third is that continued rate rises could slow global growth.
He also said the Fed’s hawkish stance could dampen oil demand, which helps explain why crude has eased slightly from recent highs.
There is a link between the two markets. Mr Makarem said any peace deal or negotiations that pushed oil prices lower would ease inflation and reduce expectations of further rate rises. That would lift bond prices.
What analysts advise
The strategists’ message was consistent. Diversify, and understand your time horizon and appetite for risk. Mr Maxwell advised investors, including small retail investors, to keep some cash available so they can respond when conditions change.
This article is for information only and does not constitute investment advice. Readers should consult a licensed financial adviser before making decisions.
For UAE savers and institutions alike, the return of meaningful bond yields has changed the options available. How long it lasts will depend on inflation, the Fed and events in the Gulf.
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