By Dr R Seetharaman
Global bond issuances were worth above $1.15tn in 2018. Major issuances came from the Federal Republic of Germany, the European Investment Bank and CVS Health Corp. Global bond issuances in 2017 were worth above $4.3tn. Global sukuk issuances in 2018 were worth above $12bn.
Major sukuk issuances came from the Republic of Indonesia — $3.18bn & Khazanah Nasional Bhd — $1.2bn. In 2017, the global sukuk issuances were above $55bn.
The US Treasury yields on last Friday booked a weekly drop as geopolitical instability kept investors pouring into the perceived safety of government paper, but for the day, rates of government paper rose, as a robust economic data suggested US growth would sustain. Industrial production rose to 1.1% in February 2018. And consumer sentiment surged to a 14-year high in March. It struggled to push higher last week as mixed economic data halted some of the bearish sentiment that has prevailed in past weeks.
Concerns that inflation would flare-up and erode the purchasing power of treasurys, pushing the Federal Reserve to hike rates more than three times this year, have unnerved financial markets in recent months. Ten-year Treasury yields are fast-approaching 3%, a level they haven’t breached since 2013. And in that instance, rates immediately fell again. Before then, the 3% level hadn’t been attained since 2011. The 10-year yield was at 2.8445% by end of last week and surged by more than 18% YTD.
Yields on the shorter end of the maturity spectrum have also had a healthy rise. This week the US Fed is preparing to raise key lending rates as economic conditions converge to put upward pressure on prices, including massive new tax cuts, a weaker dollar and even the threat of a trade war. The US Federal Reserve is expected to bring a series of interest rate hikes this year, hoping to get out in front of an expected pickup in inflation.
Fixed-income investors will experience short-term pain in the form of lower bond prices to eventually see higher expected returns over the longer term. As bonds mature or come to the market, investors can expect to see their yields rise, and thus, their expected returns. Bond market will look forward to Fed’s guidance.
Bond issues in the Gulf exceeded $20bn in 2018. Conventional bond issues in the Gulf exceeded $3.4bn, whereas sukuk exceeded $16bn in 2018. Major Gulf bond issuances came from the Sultanate of Oman —$6.5bn and the Qatar Investment Authority — $4.33bn.
Qatar’s 2018 budget assumes the same conservative oil price of $45/barrel as used for the 2017 budget. Spending is expected to total to 203.2bn riyals, up 2.4% from the budget plan for 2017, with the deficit declining 1.1% to 28.1bn riyals. The budget deficit will be financed through the issuance of debt.
Qatar had come with a $9bn bond issue in 2016. Gulf issuers are likely to continue tapping debt markets in 2018 as banks and corporates that need to refinance existing debt take the baton from sovereigns who may lessen the pace of purchases following a rebound in the price of oil.
Gulf bond sales reached a new record of $85bn in 2017 following a bumper 2016, bolstered by governments seeking to raise funds amid falling revenues from oil.
The bond market dynamics will be mainly driven by these key factors — namely the US Fed rate hikes, a surge in bond yields and the revival in oil prices and issuers are likely to remain alert to these factors.
*The author is Group CEO of Doha Bank.
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