Wednesday , May 18 2022

US Treasury yield collapse jumps Saudi 30-year bonds to record levels


The prices of Saudi debt for 30 years have reached record levels, the first of its kind since the government launched these emissions on the international and domestic markets.
In search of profitability, emerging market investors pushed Saudi Arabia's 30-year bonds to record highs, leaving the last two issues of the dollar trading between 112 and 116 cents on the dollar in the last few days, up 12-16 percent above value. Nominal, "which is in the range of 100 cents on the dollar," according to "Economic" newspaper monitoring.
These historic levels came as a natural reaction as investors in emerging-market bonds saw the yield from the 30-year US Treasury drop to record levels as fears of global economic slowdown soared and bet the Federal Reserve would have to accelerate Reducing interest rates to deal with the risks of recession.
Saudi Arabian sovereign debt instruments are determined using the US Treasury Department's benchmark yield index, with the yield of these bonds being included in the sovereign debt pricing system.
However, as US Treasury yields tend to decline, the acquisition of past GCC bond issues has become attractive to investor portfolios due to their higher yields in line with current market conditions.
The price premium was not limited to the four dollar issues of 30-year bonds, but also to the internal market, where the sole issue of 30-year-old Sukuk followed its counterpart of simultaneous bonds and became the highest-priced government debt instruments. value.
The issue ended at 1,101 rials, "up to 10 percent of the face value of 1,000 rials," as of the end of Thursday.
Levels of 30-year secondary market debt come at a time when the region is experiencing geopolitical events that have not prevented bond investors from paying a premium as close as to excessively acquire a small share of government debt in the Middle East's largest economies , which combines a high credit score. And solid economic fundamentals.

Search for yield

In an analysis published on August 7, Al-Eqtisadiah indicated an increase in secondary market demand for old GCC issues issued by governments last year, as yields on these bonds are now attractive and fixed income instruments in emerging markets have entered the Low Interest stage.
The newspaper pointed out that there was a high correlation between the high prices of these securities and the lower yield.
Monitoring at the time showed that some of the old investors were still clinging to Saudi debt because of the generous return "under current interest rates."
As the face value of negative-yield bonds exceeds the $ 13 trillion mark, investors in fixed-income markets are beginning to look at bonds in developing countries with positive returns.
Gulf region emissions are valued as a premium over the fair value that must be determined in accordance with credit ratings, as issues from countries in the region carry lower credit risk, higher credit rating and higher recurring returns than with their counterparts in countries that share the same rating.

Attractive profitability

Last year, Saudi Arabia issued a 5-year ($ 3.5 billion) 30-year bond maturing in 2049 and traded on the secondary market at levels between 112.62 and 113.37 cents on the dollar.
The last issue of the 30 bonds was $ 3.5 billion in January this year, with a return of 5.25 percent, with the tranche trading at levels between $ 116 and $ 116.50.
The US Treasury's 30-year bond closed last Friday at 2.26%. Saudi Arabia, when it issued the 30-year note, was trading at 3.03%, which means that the yield from the US Treasury has shrunk by 77 basis points in seven months. only.
The record drop in US Treasury yields is due to a trade dispute between China and the US that has had a positive impact on government bond yields in the Gulf region.
The quality of investors exposed to Saudi debt is divided into two types, including long-term investors and those willing to simply buy and sell for quick profits.

Solid economic fundamentals

What distinguishes the old versions of the UK government that came earlier this year and last year is that they are closed at a "fixed" rate of interest, which will not reduce periodic payments to investors, even if the holders of these securities for low interest rate.
It is natural that an international investor willing to pay a premium on 30-year debt instruments will vote for the stability of the economy of the Kingdom and the Vision 2030, as well as for existing reforms, given that the portfolios that buy these Securities will not recover "invested capital" until after 2046 and above, "if it is retained until such time as it is settled."

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