Middle East bonds are broader throughout the board in early European trading, and desks are besieged by selling requests. The weekend attacks in the region have cast a somber atmosphere in the market, with bankers and investors looking at headlines, hoping that the conflict will come to an end in the shortest time possible.
As far as markets are concerned, one banker said that “up to now people had been looking at [the Middle East] as a haven”. Instead, now, “there will be a whole reassessment” of Gulf credit.
For an illustration, Abu Dhabi (Aa2/AA/AA), which increased US$3 billion last week through US$1.25 billion of five-year notes at 20bp over Treasuries and US$1.75 billion of 10-year bonds at plus 25bp, has seen the longer tranche widen by 30bp. The banker added, “In the context of Abu Dhabi, that’s quite a lot.”
Another banker reported that in general, investment-grade sovereigns in the Gulf are 10bp–15bp wider, equivalent to 1–1.25 points lower in cash price.
He mentioned that low investment-grade and high-yield sovereigns have been experiencing an average decrease of their bonds by 1.75bp to two points.
Egypt, as an illustration, is approximately 25bp further apart in spread conditions, outlining the expansion of the selloff into the rest of the EM rather than confined to the Gulf. Bankers have also indicated that Sub-Saharan Africa and Turkey are other markets that are being affected.
He added, “We’re seeing a flurry of selling requests; it’s a one-way street at the moment.” However, there are Middle East corporates which are doing better, such as Aramco, which is only 5bp further away.
According to LSEG data, the Middle East has now emerged as arguably the most significant EM region in terms of primary markets, and already this year, it has seen nearly US58.5 billion of issuance.
Bankers replied that pipelines in the near-term are not necessarily particularly big due to Ramadan, and that unless the conflict extends a few weeks, this should not affect it too much.
He said, “I don’t think a month is concerning. No client is down to the wire, and if they don’t fund in the next month, it’s problematic. And there’s been a ton of issuance already. Issuers can sit out for a period of time.”
Among the positive credits of the Gulf states, there is the credit that oil prices have soared in the past four years. MUFG report this morning stated that Brent shot up as much as 13 percent before stabilizing approximately 6 percent higher around US$77 a barrel as traders responded to the practical shutdown of tanks passing through the Strait of Hormuz.
Soojin Kim, a research analyst at the Japanese bank, wrote, “While OPEC+ agreed to modest production increases, concerns persist that additional supply would be inaccessible if Hormuz remains disrupted. Oil could exceed USD100/b if flows are not restored quickly, underscoring the market’s vulnerability to prolonged geopolitical instability despite prior expectations of a global surplus.”
