Oil has hit a 15-month high on the back of optimism over the Opec deal which needs to be sorted out by November 30. But, with a record long position building across the combined benchmarks, a disappointment could leave some exposed. Full report to come within the hour....
Article / 20 July 2016 at 10:30 GMT

Weekly Bond Update: Yield hunters look to Saudi bonds

Fixed Income trader / Saxo Bank
  • Central bank stimulus programmes squeezing yields
  • Liquidity drying up due to Brexit, summer lull
  • Inaugural Saudi bond issue 'waiting in the wings'

Dubai skyline
With liquidity drying up, fixed income traders may start looking over the horizon 
to the oil-rich nations of the Gulf region. Photo: iStock 

By Michael Boye

With the Federal Reserve widely expected to have postponed its rate hike ambitions, the Bank of Japan taking another step (steps, really) further in discussing helicopter money solutions with Former Fed chair Ben Bernanke, and the European Central Bank embarking on its unprecented venture into the corporate bond market, bond investors are seeing future yield returns increasingly squeezed and liquidity conditions deteroriating.

For the latter, details released this week confirmed the wide scope and aggressive pace of ECB bond buying. So far, according to the data, the ECB has been buying bonds at a pace of no less than €400 million of corporate debt every day including positions in Telecom Italia, Glencore and Lufthansa (which are seen as high-yield, or "junk", by the market due to split ratings).

As primary markets have been wound down recently, at first due to the Brexit surprise and since then the usual summer holiday lull, the crowding out of private investors is fully effective and as a result forcing credit spreads outside the scope of ECB purchases to tighten and liquidity to slowly dry out.

The question is looming as to where do yield-stricken investors look next in order to ensure a decent return on their investments? The answer could very well turn out to be the Middle East and more specifically the Gulf countries (GCC), where Saudi Arabia is currently in holding position to steal the headlines with an inaugural international bond issuance rumoured to be waiting in the wings.

For the region, renowned for its vast, oil-derived wealth, the crude price slump has challenged fiscal budgets and resulted in widening deficits, which thus has seen a newfound need of outside financing – in part to plug the hole, but also to fund a transformation of the oil-dependent economies. 

Throw in very low sovereign debt levels (especially when compared to most of the northern hemisphere), a more mellow environment for political and economic reform (with the ambition of appealing to international investors, obviously), and the aforementioned low-yield environment across developed markets, and all of the sudden we see very strong potential for massive international investor demand.

Already this year the ground has been prepared by the record $9 billion Qatar bond issuance in May and $5bn sale by Abu Dhabi in April, which however is easily dwarfed by the $15bn bond issuance allegedly on the launching pad in Riyadh.

For the region as a whole, this transaction has the potential to be a landmark deal, and we think several additional issuers – companies and sovereigns alike – in the region are likely to be keeping a close eye, ready to launch bond issuances on their own.

With the rest of the world sporting dangerously high debt levels at near-zero returns, this supply could easily see very strong demand above and beyond from yield-starving bond investors from every corner of the world.

Saudi Arabia
Are global bond investors preparing to touch down in the Middle East? Photo: iStock 

— Edited by Michael McKenna

Michael Boye is a fixed income trader at Saxo Bank


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail