Bonds issued by the Dubai Government, banks and other corporates from the UAE have been rallying during the past three to four weeks on the strength of heightening expectations that an amicable settlement between Dubai World and its creditors will be reached soon, said market sources.

The Nakheel bond, due in 2011, has been the biggest gainer at 30 per cent. The paper, which touched a low of $35 in December, has moved up from $50 to $65 in just three to four weeks.

Talking to Emirates Business, a top official from the treasury and capital markets division of an Abu Dhabi-based bank said some bonds even gained as much as 20 to 30 per cent during the last month alone. "There are genuine traders, including large institutions from the UAE as well as overseas, which have taken a very positive view of the developments in the market. Interestingly, there are foreign institutions, especially hedge funds, which are forced to run for cover against their short positions in these bonds, pushing their traded price up," he said.

Many short sellers entered the market in the past few months, especially following the Dubai World announcement on November 25 last year regarding its $26 billion (Dh95.48bn) debt.

"They obviously calculated that they could go short on these papers and buy from the market in the future when they fall further. But various steps resulted in a very positive atmosphere, resulting in a rally in most of these papers," said analysts.