Saudi long bond shines in volatil­ity after Trump win Saudi 2046 bonds out­per­form Qatar by big mar­gin

Kuwait Times - - BUSINESS -

Saudi Ara­bia’s 30-year bonds are out­per­form­ing other Gulf debt dur­ing volatil­ity trig­gered by Don­ald Trump’s elec­tion as US pres­i­dent, a sign of un­sat­is­fied de­mand for Saudi debt and a good omen for is­suance ex­pected from Riyadh next year. The week to Nov 16 saw the largest out­flows from emerg­ing mar­ket debt on record, ac­cord­ing to Bank of America Mer­rill Lynch, partly be­cause Trump’s elec­tion fu­elled ex­pec­ta­tions of in­fla­tion­ary eco­nomic pol­icy and higher US in­ter­est rates.

The $17.5 bil­lion of pa­per which Riyadh is­sued last month, in its first in­ter­na­tional sov­er­eign bond sale, was ini­tially hit hard. The 2046 tranche sank to 90.5 cents on Nov. 14 from 98.1 cents on elec­tion day, Nov. 8.

But Saudi 30-year bonds have since bounced back, to 95.6 cents, out­per­form­ing Qatari debt which was pre­vi­ously seen as the bench­mark for 30-year bonds in the Gulf. “The bond is still trad­ing very tight, and very tight to Qatar too, even tighter than be­fore the Trump win,” a Lon­don-based trader said of Saudi 30year bonds, which have also out­per­formed US Trea­suries. Their yield is up 16 ba­sis points since the US elec­tion, com­pared to a rise of 37 bps for the 30-year US Trea­sury.

“We are see­ing cap­i­tal out­flows from emerg­ing mar­ket debt, but Saudi is not hit by it,” said a Dubai banker, adding that there was strong de­mand from Asian banks for the longer bonds.

Shorter-term Saudi bonds have also out­per­formed, to a lesser ex­tent. Saudi Ara­bia’s 10-year pa­per is at 95.3 cents against 98.4 cents on Nov. 8; Qatar’s 2026 notes are at 97.7 cents against 101.3 cents.

One fac­tor bankers say is be­hind the out­per­for­mance is the “grav­i­ta­tional power” of the Saudi issue’s huge size, the big­gest emerg­ing mar­ket sov­er­eign debt sale in his­tory. Be­cause the issue is so big, in­vestors are at­tracted by its am­ple liq­uid­ity in the sec­ondary mar­ket and have been sell­ing less liq­uid Gulf pa­per to buy Saudi bonds. Another fac­tor is the struc­ture of pri­mary mar­ket al­lo­ca­tions. Asian in­vestors took 22 per­cent of the $6.5 bil­lion of Saudi 30-year notes and US buy­ers, 44 per­cent.

Euro­pean in­vestors also took a share, leav­ing an un­usu­ally small al­lo­ca­tion for Gulf banks, which are now buy­ing in the sec­ondary mar­ket, a United Arab Emi­rates-based fixed income trader said.

A third fac­tor is an eas­ing of con­cern about Saudi Ara­bia’s abil­ity to cope with low oil prices. Although the long-term out­look re­mains un­cer­tain, many in­vestors think dra­co­nian state spend­ing cuts and the suc­cess of last month’s sov­er­eign bond issue have averted the threat of a fi­nan­cial cri­sis for now. The cost of in­sur­ing Saudi sov­er­eign debt against de­fault over the next five years dropped this week to its low­est since Oc­to­ber 2015. — Reuters

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