Investors have been unloading bonds from Saudi Arabia and other Gulf states since a surprise OPEC+ production cut on the weekend sent the price of oil surging, an unusual move that traders say reflects how expensive the region’s debt has become.
(Bloomberg) — Investors have been unloading bonds from Saudi Arabia and other Gulf states since a surprise OPEC+ production cut on the weekend sent the price of oil surging, an unusual move that traders say reflects how expensive the region’s debt has become.
Dollar bonds issued by governments in the region were among the biggest losers in emerging markets Monday, even amid sharp gains in oil. Most of the securities remained under pressure on Tuesday, with Saudi Arabia’s note due in 2025 the biggest loser in emerging markets and headed for a record decline.
It was unclear who was selling or why. Increases in the price of oil would typically be expected to boost demand for energy exporters’ debt.
But bonds from Saudi Arabia accounted for three of the top 10 losers in the developing world when markets opened on Monday, while notes from the United Arab Emirates and Qatar also fell. Saudi Arabia’s bond due 2027 fell by a record, with the yield rising 1.6 percentage points to 4.2% at the close.
Cheaper Elsewhere
“It’s largely because of valuations,” said Todd Schubert, the Dubai-based head of fixed-income research at Bank of Singapore. “Spreads are not compelling relative to corporates from similarly rated countries in Asia such as Japan or Korea.”
Illustrating that trend, Riyadh-based Al Rajhi Bank sold Islamic debt maturing in 2028 at a risk premium of 110 basis points over US Treasuries last week. In comparison, Korea National Oil Corp. issued a dollar bond with a similar maturity at a spread of 135 basis points.
The bonds of Gulf Cooperation Council nations had outperformed their developing peers since early 2021 as a rebound in crude boosted their coffers. Investors also sought their relative safety as Russia’s invasion of Ukraine and higher US yields sparked fears of a default wave across emerging markets.
“Given the fact that regional spreads are already tighter than global EM, I would not expect huge outperformance” due to the production cuts, said Abdul Kadir Hussain, head of fixed-income asset management at Dubai-based Arqaam Capital. “This won’t change the fundamental dynamics of GCC bonds, which will remain the ‘safe haven’ trade.”
Saudi Arabia’s oil moves have been condemned by Joe Biden’s White House, which says they’re counterproductive at a time when much of the world is still dealing with a cost-of-living crisis. Biden vowed after an initial production cut last year that there would be “consequences” for Saudi Arabia, but the administration has yet to follow through.
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