The Daily Update - The Search for Yield Continues

Globally, ~$13.4tn of bonds are now trading on negative yields so it was not altogether surprising to see the Kingdom of Saudi Arabia take advantage of low rates in Europe to diversify its funding base and come to market with a €3bn dual tranche bond issue. The bonds offered a coupon of 0.75% on the 8 year and 2% on the 20 year. Needless to say, the issue was heavily oversubscribed with the final book exceeding €14.5bn: after all Saudi Arabia is rated A1/A+ by Moody’s/Fitch and the euro denominated 8 year paper priced on a yield of 0.782% which compares favourably to similarly rated euro sovereign issuers. For example, Slovakia 1.375% 2027 (rated A2/A+ by Moody’s/Fitch) is trading on a yield of -0.15% and Irish TSY 1.1% 2029 (rated A2/A+) trades on a yield of 0.07%.

The deal has merits using the euro as a base currency as it avoids onerous hedging costs from US dollar denominated paper although this has to be set against greater scope for rates to go lower in the US dollar based universe. The annualised 3M dollar hedge cost for euro-based investors is ~2.8% which eats into much of the yield from the USD denominated Saudi International 3.625% 2028 bond which yields 3.01%.

With this backdrop in mind, it was not altogether surprising to see that last month GCC bond markets were strong performers again as investors searched for areas where positive yields, attractive fundamentals and valuations are available. This is particularly so for GCC fixed income markets where greater index inclusion has been raising investor awareness. For example, sovereign issues such as the State of Qatar 6.4% 2040 issue (rated Aa3/AA- by Moody’s/S&P) trades on a yield of ~3.5% and trades ~2.7 credit notches cheap on our models. A number of quasi sovereign issuers also look attractive e.g. Abu Dhabi Crude Oil Pipeline 4.6% 2047 (rated AA by both S&P and Fitch) trading on a yield ~3.7% and trading ~4.2 credit notches cheap.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.