The Middle East has been one of the best performing regions so far this year with, for example, Mubadala 6.875% 2041s (previously IPIC 2014 before the companies merged), trading at all-time highs this month. Issued at a spread of 350bps over US Treasuries, this bond is currently trading at around 150bps over. This AA-rated bond still remains attractive even at these levels. We calculate that the issue offers an expected return and yield of around 12.3%, the bond is also over three notches cheap, offering significant downside protection. The fact that Mubadala is Abu Dhabi’s sovereign wealth fund, thus 100% state-owned adds a further layer of protection.
High-grade Russian bonds have also been strong performers, with the likes of state-owned Gazprom 8.625% 2034s tightening ~125bps so far this year to a still very attractive yield of 5%. We calculate that if the Baa2/BBB- bond, currently trading at a spread around 275bps over US Treasuries, were to tighten to levels closer to similar bonds we could see a capital appreciation of ~8%. Russia’s 5 year CDS has recently dropped to near 2007 levels, at just above 100. To give this some perspective this was as high as 630 in 2015 during the Ukraine crisis, and Turkey and Brazil are currently trading close to 375 and 130, respectively.
As spreads across investment grade bonds continue to tighten, off the back of broader global economic weakness concerns, and thus expectations for interest rate cuts, it appears to us that high-grade, long-duration bonds remain attractive.