Globally, ~$13.4tn of bonds are now trading on negative yields so it was not altogether surprising to see the Kingdom of Saudi Arabia take advantage of low rates in Europe to diversify its funding base and come to market with a €3bn dual tranche bond issue. The bonds offered a coupon of 0.75% on the 8 year and 2% on the 20 year. Needless to say, the issue was heavily oversubscribed with the final book exceeding €14.5bn: after all Saudi Arabia is rated A1/A+ by Moody’s/Fitch and the euro denominated 8 year paper priced on a yield of 0.782% which compares favourably to similarly rated euro sovereign issuers. For example, Slovakia 1.375% 2027 (rated A2/A+ by Moody’s/Fitch) is trading on a yield of -0.15% and Irish TSY 1.1% 2029 (rated A2/A+) trades on a yield of 0.07%.
The deal has merits using the euro as a base currency as it avoids onerous hedging costs from US dollar denominated paper although this has to be set against greater scope for rates to go lower in the US dollar based universe. The annualised 3M dollar hedge cost for euro-based investors is ~2.8% which eats into much of the yield from the USD denominated Saudi International 3.625% 2028 bond which yields 3.01%.
With this backdrop in mind, it was not altogether surprising to see that last month GCC bond markets were strong performers again as investors searched for areas where positive yields, attractive fundamentals and valuations are available. This is particularly so for GCC fixed income markets where greater index inclusion has been raising investor awareness. For example, sovereign issues such as the State of Qatar 6.4% 2040 issue (rated Aa3/AA- by Moody’s/S&P) trades on a yield of ~3.5% and trades ~2.7 credit notches cheap on our models. A number of quasi sovereign issuers also look attractive e.g. Abu Dhabi Crude Oil Pipeline 4.6% 2047 (rated AA by both S&P and Fitch) trading on a yield ~3.7% and trading ~4.2 credit notches cheap.