- Last week's Saudi bond issuance met with $67bn order book
- Investor appetite for sovereign debt in Gulf region strong
- Oman bonds might prove preferable to Saudi counterparts
The Great Mosque at Muscat: Although the new Saudi bonds are being met with a great deal of fanfare, their Omani counterparts may prove the stronger bet. Photo: iStock
By Michael Boye
Pundits have been looking at the rumour as yet another sign of financial and economic reform inside the old kingdom, and perhaps signalling a more responsive approach towards international capital markets. However, the real reason might just as likely be found in the massive public budget shortfall that Saudi Arabia – and the Gulf region as a whole – has endured in the wake of the collapse in oil prices.
Despite the weakening fundamentals for these oil-dependent economies, investor appetite for sovereign debt in the region has remained firm, as was confirmed earlier this year with the record $9 billion Qatar bond issuance in May and the $5bn sale by Abu Dhabi in April.
This evidence certainly lifted the incentive for Riyadh to tap the market on its own, which it then finally did last week. In spite of lofty expectations ahead, the new issuance exceeded any of these with a combined size of more than $17bn between the new five-, 10-, and 30-year bonds.
Looking more closely at the price of the deal, the combined order book of a staggering $67bn total from the investor base allowed for some quite significant spread tightening – lower yields, that is – from the initial indicated levels. Since the bonds were launched, trading in the secondary market has taken spreads and yields even lower!
Spread (to the relevant Treasury benchmark) for the new KSA bonds at initial guidance, issuance, and current trading:
Source: Bloomberg, Saxo Bank
Consequently, in yield terms the reward for investors left on the outside looking in will find the current levels in the new Saudi Arabia bonds increasingly less appealing. This might be particularly true in comparison to other government bonds in the region, which arguably have a very similar risk profile – namely a significant and monotonous oil exposure.
The aforementioned Qatar bonds, which are Aa2 rated by Moody's (the third highest obtainable rating with the agency and two notches higher than the A1 rating awarded to Saudi Arabia), are thus currently trading only a touch tighter than the new Saudi bonds.
Yield to maturity for selected USD bonds from Saudi Arabia, Qatar, and Oman:
Source: Bloomberg, Saxo Bank
Alternatively, investors might begin to look in the direction of the Sultanate of Oman, which under much less fanfare and attention also issued new bonds a couple of months back in June.
With a solid Investment Grade rating standing at Baa1 with Moody's, these bonds yield about a full percentage point on top of the Saudi bonds, which might be difficult for the market to ignore once the novelty of the new record deal in Saudi Arabia has worn off.
— Edited by Michael McKenna
Michael Boye is a fixed income trader at Saxo Bank