With US Treasury yields at their highest since 2007, analysts urge investors to maintain balanced portfolios.
Investors in the UAE and across the Gulf are showing growing interest in bonds as the yield on the 10-year US Treasury reaches 5 per cent, its highest level since 2007.
Trading industry executives said demand for bonds has strengthened globally, including across Gulf markets. However, with geopolitical uncertainty remaining elevated, analysts are advising investors to maintain diversified portfolios and keep some cash in reserve as US interest rates rise and regional tensions put upward pressure on oil prices.
Wael Makarem, financial markets strategist lead at Exness, said there was significant global interest in bonds offering yields of around 5 per cent, including among investors in the UAE and wider GCC.
“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],” he said.
Makarem described the current yield as an attractive return that gives investors greater scope to diversify across bonds, equities and other asset classes.
He added that capital sitting on the sidelines is increasingly looking to lock in returns of between 5 and 6 per cent on A-grade bonds, while higher-risk issuers are offering yields several percentage points above those levels.
The 10-year Treasury yield reached 5 per cent during the current quarter, Makarem said, returning to levels last seen around 2006 or 2007.
The main risk for bond investors is price volatility if the US Federal Reserve continues tightening monetary policy. However, Makarem said any peace agreement or negotiations that lead to lower oil prices could ease inflationary pressures and reduce expectations of further rate increases, potentially supporting bond prices.
The US Federal Reserve raised interest rates by 25 basis points in mid-September, its first increase in three years, taking the target range to between 3.75 per cent and 4 per cent as policymakers sought to contain inflation in the world’s largest economy.
Buyers ‘tipping a toe in the water’
Ahmad Assiri, research strategist at Pepperstone, said even strong inflows into US Treasuries were unlikely to move the market significantly, given that it is the world’s largest and most liquid bond market, with major banks and institutions trading on a daily basis.
He said the number of buyers remains well below the level needed to push yields meaningfully lower, with many investors simply “tipping a toe in the water” and gradually building their positions.
Assiri described US Treasuries as an attractive source of income, particularly for investors in their 30s and 40s who are planning their future cash flows.
He noted that yields on two-year, five-year and 10-year Treasuries are within around 10 basis points of each other, a situation he described as “almost an arbitrage”.
The five-year real yield, which takes inflation into account, stands at around 2.3 per cent, he said, stressing that diversification remains particularly important in the current environment.
Ross Maxwell, chief strategy officer at VT Markets, said higher bond yields largely reflect expectations of further US interest rate increases, with central banks clearly shifting their focus towards tackling inflation.
He said the Federal Reserve’s hawkish stance could also weigh on global oil demand, helping explain why crude prices have eased slightly from their recent highs.
Maxwell highlighted three key risks facing investors. A further escalation of geopolitical tensions in the Middle East could disrupt oil supplies, while higher borrowing costs could weigh on earnings and infrastructure spending in technology-led equity markets, potentially increasing the risk of a correction. Continued interest rate increases could also put additional pressure on global economic growth.
He advised investors, including smaller retail participants, to consider their investment horizons and risk tolerance carefully and understand the risks associated with each asset class.
“Keep some liquidity available to be able to keep you more flexible when these sorts of risks come about,” Maxwell said.
