The prospect of higher interest rates in the wake of Donald Trump’s US election victory could prompt Arabian Gulf governments that have already tapped a record US$40 billion in bonds and sukuk this year to put a hold on issuances. But the break might be no more than temporary if oil prices languish at their current levels.
President-elect Trump’s surprising win has already spooked bond investors over concern that his plans for fiscal stimulus may spur inflation and thereby bring higher interest rates.
Higher interest rates make it more expensive to issue bonds, since these pay their holders interest each year at a rate that reflects prevailing rates at the time of issuance.
“I anticipate no further GCC sovereign issuance this year,” said Andy Cairns, the global head of debt origination and distribution at National Bank of Abu Dhabi.
Given the election result, he said, “the market is expecting a Fed hike at the December 14 meeting plus up to three Federal Open Market Committee moves during 2017. Consequently there’s less incentive for issuers to rush to market to get ahead of the Fed as this is already priced in”.
Regional governments have been selling international bonds and sukuk, in the case of Saudi Arabia for the first time, in a bid to plug holes in their budget, burnt by collapsing oil prices.
“You have the issue of the budget deficits and on that particular equation, it’s safe to say that we will expect another year of pretty significant issuance,” said Mohieddine Kronfol, chief investment officer for global sukuk and Middle East and North Africa fixed income at the asset manager Franklin Templeton.
He added: “2016 has been a record year and the main drive of that has been sovereign issuance to plug the budget deficits that occurred this year and are likely to persist in the next few years with oil prices where they are.”
Mr Cairns likewise expects 2017 volumes to be up even on this year’s record numbers.
GCC governments, as well as related entities and companies, have been ramping up bond sales in international markets. The UAE accounted for $14.4bn issued in the second quarter, Qatar $9bn and Oman $5bn, according to a report in September from the Bank for International Settlements. This year, all types of Arabian Gulf issuers have sold $70bn in bonds and sukuk, of which governments represent 60 per cent of the total.
In April, Abu Dhabi’s Department of Finance sold a $2.5bn tranche of five-year bonds yielding 2.125 per cent and another $2.5bn tranche of 10-year bonds yielding 3.125 per cent. Qatar and Oman have also sold bonds this year at higher rates.
The pièce de résistance came in October when Saudi Arabia came to the market with a US$17.5bn debut dollar international bond sale. The debt sale was split into tranches of five-, 10- and 30-year bonds. The country sold $5.5bn of the five-year tranche, $5.5bn of the 10-year and $6.5bn of the 30-year, with total demand for the bonds amounting to $67bn.
Appetite for emerging market debt has been dented by the November 8 election result. Since Mr. Trump’s victory the Bloomberg US Dollar Emerging Market Sovereign Bond Index has slipped 4.9 per cent. Still, it is up 8 per cent for the year to date as global investors have been hunting for yield in a world of low interest rates.
A broader measure of the bond market, the Bloomberg Barclays global bond index, is down 4.0 per cent since Mr Trump’s election. But it is still up 2.7 per cent for the year to date.
Much of the fortunes of bonds depend on the direction of interest rates, a guessing game that is something of a sport on Wall Street. The most useful indicators are future traders and they see a 98 per cent probability of a Fed hike next month, up from 80 per cent on November 7, according to data compiled by Bloomberg based on Fed funds futures.
mkassem@thenational.ae
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