Saudi Debt Beats Peers for Now as Bond Traders Brace for Biden

The bonds of OPEC’s largest crude producer have shrugged off historically low energy prices and the coronavirus pandemic this year. Investors are pondering how long that outperformance will last with Joe Biden in the White House.

Saudi Arabia’s U.S. dollar-denominated debt has handed investors an average return of about 10% this year through Nov. 13, the second-best performance among developing nations, according to data compiled by Bloomberg.

Despite its dependence on crude, the kingdom is one of the highest-rated sovereigns in emerging markets and its yields are more closely correlated to U.S. Treasuries than those of its developing-nation peers. Its $7 billion sale of Eurobonds in April was heavily oversubscribed, with investors placing around $54 billion of orders. The yield on Saudi Arabia’s 2060 dollar notes has dropped more than a percentage point since their offering seven months ago.

“There was a strong interest by Taiwanese insurers for A-rated longer-dated debt, and Saudi as well as Qatar have been net beneficiaries of this hunt for yield,” said Sergey Dergachev, a money manager at Union Investment Privatfonds GmbH in Frankfurt. Saudi-specific themes “have almost not been a driver at all for credit spreads of the country’s sovereign bonds this year,” he said.

At the same time, Biden’s victory has raised concern that U.S. relations with the Gulf nation could cool as its leaders face more of the traditional American scolding over human rights and a restoration of the diplomatic norms bypassed by Donald Trump.

The new White House administration could become an important “medium-term theme” for Saudi Arabia, according to Dergachev.

Saudi Arabia’s bonds are also already “fairly valued,” even though their spreads are trading at wider levels than similarly rated Malaysian debt, said Abdul Kadir Hussain, the head of fixed-income asset management at Arqaam Capital in Dubai.

The kingdom’s “credit trends are negative, at current oil prices,” he said. “I would not expect any further spread tightening.”

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