• 5 minutes Global Economy-Bad Days Are coming
  • 8 minutes IT IS FINISHED. OPEC Victorious
  • 14 minutes Venezuela continues to sink in misery
  • 17 minutes Could Tesla Buy GM?
  • 8 mins OPEC Cuts Deep to Save Cartel
  • 1 hour Paris Is Burning Over Climate Change Taxes -- Is America Next?
  • 11 hours Price Decline in Chinese Solar Panels
  • 6 hours What will the future hold for nations dependent on high oil prices.
  • 4 hours And the War on LNG is Now On
  • 10 mins Rage Without Proof: Maduro Accuses U.S. Official Of Plotting Venezuela Invasion
  • 16 hours Alberta Cuts Push Prices Too High
  • 2 hours U.S. Senate Advances Resolution To End Military Support For Saudis In Yemen
  • 3 hours How High Can Oil Prices Rise? (Part 2 of my previous thread)
  • 2 days Congrats: 4 journalists and a newspaper are Time’s Person of the Year
  • 8 hours USGS Announces Largest Continuous Oil Assessment in Texas and New Mexico
  • 12 hours Rigs Down
Alt Text

Could Iraq Be The Next OPEC Member To Exit?

Just two days after Qatar’s…

Alt Text

Putin Looks To Capitalize On Waning U.S.-Saudi Relations

With U.S.-Saudi relations dwindling, Crown…

Alt Text

Oil Majors Cautious But Upbeat About 2019

Oil majors ConocoPhilips and Hess…

Safehaven.com

Safehaven.com

Safehaven.com is one of the most established finance and news sites in the world, providing insight into the most important sectors in the business and…

More Info

Trending Discussions

Plunging Oil Prices Weigh On Saudi Bonds

For investors looking for stability and income, bonds are usually considered an attractive proposition. In the current environment of rising interest rates, international bonds are likely to outperform U.S. bonds. At first glance, that might seem counterintuitive given that many international bonds offer lower yields than U.S. bonds with some even providing negative yields. Yet, rising yields usually lead to a fall in bond prices that’s usually more than enough to counteract higher yields thus leading to lower overall returns.

Case in point: the Vanguard Total International Bond ETF (BNDX) sports higher total returns compared to the U.S.-focused Vanguard Total Bond Market ETF (BND).

One such class of international bonds is Saudi bonds, which have been roiled by a sharp fall in oil prices as well as the ongoing outrage over the murder of international journalist and Washington Post columnist, Jamal Khashoggi.

Saudi Arabia is extremely reliant on oil, with oil revenue accounting for 90 percent of the nation’s export earnings and 42 percent to GDP. Oil prices have declined sharply, with WTI falling from mid-70s per barrel to mid-50s in less than two months, partly due to the U.S. granting surprise waivers for sanctioned Iran crude.

Source: NASDAQ

Meanwhile, international outrage on the role played by the Saudi government in the murder of Khashoggi in the Saudi consulate in Turkey seemed to increase the risk that the U.S. would impose stiff penalties on the country.

The confluence of these factors has led to Saudi bonds falling quite dramatically with yields climbing. Saudi Arabia’s $5 billion bonds due 2028 have recorded a sharp rise in yield during the last week. The bonds now yield 4.6 percent—significantly higher than the U.S. 3 percent yield for 10-year notes. Related: Can Oil Solve Washington’s Syria Dilemma?

Meanwhile, the kingdom’s five-year credit default swaps jumped 41 percent during the last quarter to 96 basis points, the most among 40 contracts tracked by Bloomberg across the globe.



Source: Bloomberg

Good Entry Point

Despite the murky geopolitical situation in the country, it doesn’t seem very likely that the situation will deteriorate further.

Washington has already announced sanctions against 17 Saudi officials in connection with the murder of Khashoggi. However, it seems unlikely that President Trump’s administration will announce measures that target the Saudi regime more broadly despite some U.S. lawmakers calling for more punitive measures.

On Tuesday, Trump issued an extraordinary statement declaring that the U.S. will remain a steadfast partner to Saudi Arabia despite conceding that crown prince Mohammed bin Salman may have been aware of a plot to kill Khashoggi. Indeed, Trump has gone ahead and thanked Saudi Arabia for lower oil prices in a tweet on Wednesday:



The administration’s willingness to overlook human rights abuses—even the murder of a U.S. citizen—seems to be the latest twist in a tacit deal between Washington and Riyadh where the former is expected to eliminate or reduce Iran’s oil export revenue while the latter continues stabilizing prices in its traditional role as a swing producer. Nobody at this point expects oil prices to collapse to 2014 levels, so that provides a nice floor for investors.

The latest development, therefore, offers a good entry point for bargain hunters who are hoping that Saudi bonds will not continue dropping once they build positions.

But it’s not just Saudi bonds that have recorded rising yields.

Oman and Bahrain, two of the region’s weakest economies, have seen their bonds hit by the oil rout, with Oman bonds now yielding 6.6 percent. Despite the fall in crude prices, Gulf economies are expected to remain strong. GCC (Gulf Cooperation Council) economies are expected to expand 2.4 percent this year and 3 percent in 2019 after contracting in 2017.

By Alex Kimani via Safehaven.com

More Top Reads From Oilprice.com:




Back to homepage

Trending Discussions


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News