The Daily Update - Qatar and US sign memorandum

Good news for Qatar yesterday; more than 5 weeks into the dispute with a quartet of its neighbours, as the first batch of 4,000 airlifted cows began to arrive… Also, more importantly but less droll,  Qatari bonds have rallied as much as 2.8% over yesterday and today following US Secretary of State, Rex Tillerson’s comments in Doha on the ‘very reasonable’ position of Qatar and the signing of (an apparently year-in-the-making) memorandum uniting their commitments against terrorism and terrorism financing. As Qatar continues to make reasonable concessions (and internationally recognised therein) on the most important issues this adds further pressure for the countries leading the boycott to concede on their more prejudice demands.

Along with meeting representatives of Qatar and Kuwaiti mediators yesterday, Tillerson is today expected to meet with Saudi King Salman in Jeddah along with foreign ministers from Bahrain, Egypt, Saudi Arabia and the UAE. A full resolution is still going to take time, no one is expecting an immediate breakthrough. First, the agreement with the US doesn’t have any implications for the influential and contentious Al Jazeera. Second, it clearly does not mean withdrawing involvement in the Gaza Strip; another announcement yesterday out of Qatar affirmed their continued support of development and reconstruction projects in the Hamas controlled region. However, with these developments and the likes of Tillerson (and Boris Johnson…) throwing their weight behind the mediations a reasonable resolution is starting to take shape.

With the recent rally, the region’s bonds are now trading around year-to-date averages and according to our model still offer significant relative value for what are Aa3 rated bonds from the richest country per capita in the world. For example the Qatar 2046s yield 4.5%, that is over 2.4x more than Belgium 2047s yielding less than 1.9% both Aa3 rated. Each country clearly has contrasting strengths and risks but we believe the additional 2.6% yield is an attractive opportunity for the assumed risk. Qatar’s underlying fundamentals, its constrained engagement with the spat thus far, the mutual benefit to all of a resolution and now the increasing international support for swift mediation add further support to our confidence in the region.

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