Complex Made Simple

Saudi long bond shines in volatility after Trump win

* Saudi 2046 bonds outperform Qatar by big margin

* Shorter-dated bonds outperform to lesser extent

* Liquidity of Saudi bonds exerting “gravitational power”

* Gulf banks buying after under-allocation in primary market

* Positive signal for issuance by Riyadh next year

Saudi Arabia’s 30-year bonds are outperforming other Gulf debt during volatility triggered by Donald Trump’s election as U.S. president, a sign of unsatisfied demand for Saudi debt and a good omen for issuance expected from Riyadh next year.

The week to Nov. 16 saw the largest outflows from emerging market debt on record, according to Bank of America Merrill Lynch, partly because Trump’s election fuelled expectations of inflationary economic policy and higher U.S. interest rates.

The $17.5 billion of paper which Riyadh issued last month, in its first international sovereign bond sale, was initially hit hard. The 2046 tranche sank to 90.5 cents on Nov. 14 from 98.1 cents on election day, Nov. 8.

But Saudi 30-year bonds have since bounced back, to 95.6 cents, outperforming Qatari debt which was previously seen as the benchmark for 30-year bonds in the Gulf.

“The bond is still trading very tight, and very tight to Qatar too, even tighter than before the Trump win,” a London-based trader said of Saudi 30-year bonds, which have also outperformed U.S. Treasuries. Their yield is up 16 basis points since the U.S. election, compared to a rise of 37 bps for the 30-year U.S. Treasury.

“We are seeing capital outflows from emerging market debt, but Saudi is not hit by it,” said a Dubai banker, adding that there was strong demand from Asian banks for the longer bonds.

Shorter-term Saudi bonds have also outperformed, to a lesser extent. Saudi Arabia’s 10-year paper is at 95.3 cents against 98.4 cents on Nov. 8; Qatar’s 2026 notes are at 97.7 cents against 101.3 cents.


One factor bankers say is behind the outperformance is the “gravitational power” of the Saudi issue’s huge size, the biggest emerging market sovereign debt sale in history.

Because the issue is so big, investors are attracted by its ample liquidity in the secondary market and have been selling less liquid Gulf paper to buy Saudi bonds.

Another factor is the structure of primary market allocations. Asian investors took 22 percent of the $6.5 billion of Saudi 30-year notes and U.S. buyers, 44 percent.

European investors also took a share, leaving an unusually small allocation for Gulf banks, which are now buying in the secondary market, a United Arab Emirates-based fixed income trader said.

A third factor is an easing of concern about Saudi Arabia’s ability to cope with low oil prices. Although the long-term outlook remains uncertain, many investors think draconian state spending cuts and the success of last month’s sovereign bond issue have averted the threat of a financial crisis for now.

The cost of insuring Saudi sovereign debt against default over the next five years dropped this week to its lowest since October 2015.