- Bond prices rebounded after ceasefire
- Down overall since start of war
- Similar pattern for corporate bonds
Most Gulf sovereign bond prices have rebounded since Iran and the US announced a tentative ceasefire on April 8, indicating investor confidence in the strength of regional economies and optimism that the conflict will not harm issuers’ finances in the long term.
Long considered safe havens within emerging markets thanks to their stable governments, hefty energy revenues and dollar pegs, five of the six Gulf countries – Bahrain apart – are rated investment grade by credit ratings agencies.
Separately, ahead of the Iran war, these agencies upgraded several countries in the Middle East and North Africa including Egypt, Jordan and Morocco.
“The region has been an improving credit story,” said Amol Shitole, head of fixed income at Dubai’s Mashreq Capital, explaining that this positive momentum helped Mena bonds rebound from March lows.
For example, a 30-year Saudi Arabian sovereign bond plunged almost 7 percent from February 27 – the day before US-Israeli strikes on Iran – to its March low but has since rebounded nearly 5 percent.
Other Mena sovereign bonds have followed similar trajectories. UAE, Egyptian, Omani and Moroccan bonds are now down 1.4-2.1 percent since the war began. Jordanian and Kuwaiti bonds are near-flat. Bahraini bonds are down 3.7 percent over the same period, the worst performer among those AGBI analysed.
“Markets generally have been consistently more optimistic about the conflict than reality, pricing in a relatively swift end and no long-lasting impact,” said Mohieddine Kronfol, chief investment officer for global sukuk and Mena fixed income at Franklin Templeton in Dubai.
“The market has taken the challenges of this conflict in its stride, and the pricing reflects that optimism.”
Mena bond spreads versus US treasuries have widened by about 30 basis points, aside from those of Bahraini sovereign debt and Dubai real estate bonds which increased substantially more, said Kronfol.
“Overall, markets have been measured and resilient and haven’t priced in much downside,” said Kronfol. “Generally, that’s good because those that have invested in the region had something that was quite defensive and quite safe. But it’s also more challenging to deploy money now because there’s a slight disconnect between the evident risks and pricing (which) is saying there has been a very minimal change in risk.”
Part of Gulf sovereign bonds’ price resilience is a result of the strong macroeconomic fundamentals underpinning the countries’ economies.
“In a world drowning in debt, the Gulf stood out as less indebted and the region entered this crisis from a position of strength,” said Kronfol. “If you assume that oil and gas production facilities remain broadly intact, there won’t be a massive deterioration in those credit fundamentals.”
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To evaluate the broader performance of regional bonds, Mashreq Capital analyses the Bloomberg USD Aggregate Mena Bond Index, which includes the six GCC countries plus Egypt, Iraq, Jordan and Lebanon.
From the end of February to its March low, the index fell about 4 percent. It has since recovered most of these losses to be just 1 percent below its pre-war level.
“Mena bonds have made a near V-shaped recovery,” said Shitole. “It’s a similar trajectory to other global risk assets and isn’t surprising considering that regional fixed income is a high-quality segment of emerging markets.”
Non-bank corporate bond issuance in the Gulf is relatively rare, with regional companies usually preferring other forms of borrowing. Most have followed the same price trend as sovereign debt: a slight increase from January to February-end, a precipitous decline in March ahead of a more muted rebound following the ceasefire.
For example, a Saudi Aramco 40-year bond maturing in 2064 plunged 7.4 percent from the end of February to a March low, before rebounding 5 percent to be down a modest 2.7 percent during the past six weeks overall.