- Central bank stimulus programmes squeezing yields
- Liquidity drying up due to Brexit, summer lull
- Inaugural Saudi bond issue 'waiting in the wings'
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
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.
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.
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