Oil price drop leads Gulf’s government bonds to fall

• Turmoil spreads to sovereign debt
• UAE and Saudi bonds fall
• Oil price down to $60 per barrel

Dollar-denominated sovereign bonds of Middle East and North African countries slid on Monday as President Donald Trump took effective US tariff rates to their highest in more than a century, causing steep declines in global stock markets and a flight to safety in US government debt.

Saudi Arabia’s stock index tumbled to a 17-month low in early Monday trading before rebounding slightly, while equities worldwide have been routed on fears that Washington’s moves will spark a global recession. Oil prices also plummeted.

The turmoil spread to Mena sovereign debt, although bonds are generally less volatile than stocks because they offer more predictable returns and lower risk.

UAE and Saudi Arabia government bonds fell 0.5 and 1.6 percent respectively, while a $4.5 billion Kuwaiti government 10-year bond declined to 97.6, easing from Thursday’s six-month high. Bond prices begin at a par value of 100.

Gulf sovereign bond prices have proved more resilient than those of other emerging markets, said Abdul Kadir Hussain, head of fixed income at Arqaam Capital in Dubai.

“Higher-risk countries like Turkey, Egypt and Morocco have weakened more, while Abu Dhabi and Qatar have outperformed which is to be expected as investors seek the safest and highest quality sovereign borrowers,” he said.

GCC debt had a lower weighting among emerging market fund managers which helped shield it from the sell-off, said Manuel Al Mutawa, vice president for fixed income asset management at Bahrain’s Sico bank.

“It’s too early to tell the long term implications for Mena fixed income,” he said. “For the time being we will see a combination of short covering and opportunistic buying which should add a technical floor in the short term until there is more clarity.”

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US 10-year treasury bond yields fell to 3.97 percent, a six-month low. Bond yields are inversely correlated to prices, so the falling yield shows increased buying demand from investors for the safe-haven asset.

The price of 10-year treasury bonds was up 0.8 percent on Monday. This is due partly to investors seeking safe haven assets and also a reflection of market expectations regarding interest rates, said Hussain. 

The consensus is now for five US rate cuts over the next two years versus 1-2 reductions prior to the Trump tariff shock.

“Given that inflation remains very much alive, this seems overly aggressive but that’s what the market feels right now, which is why the treasury yields have fallen. Yields on short-dated debt are down even more,” said Hussain. 

Spreads on GCC debt versus US treasuries are up by about 0.2 percentage points in April, hitting a six-month high. Spread on higher-yield Mena sovereign bonds have widened further.

“That’s reasonable given that there is now greater uncertainty and more risk,” said Mohieddine Kronfol, chief investment officer for global sukuk and head of Mena fixed income at Franklin Templeton in Dubai. “Lower oil prices will exert pressure on Gulf sovereigns and by extension the other issuers in the region.”

Kronfol added: “We will be cautious, but see this as an opportunity to take advantage of improved valuations. We would be looking to increase credit exposure in the days and weeks ahead.”

An Egyptian 30-year, $2 billion bond maturing in 2047 plunged 4.2 percent to 67, taking its losses to 12 percent since April 1. Tunisian central bank debt slipped to a four-week low of 97.

On average, Gulf governments count on oil for at least half their revenue. From a high this month of $72.3 dollar per barrel, crude oil WTI prices have plunged more than 15 percent and are hovering around $60 per barrel now, their lowest since February 2021.

“We anticipate oil prices will stabilise in the $60 range, which would be manageable for Qatar and the UAE and somewhat for Oman, given their low spending needs,” added Al Mutawa.

“Conversely, Bahrain’s fiscal balances could be negatively impacted due to high break-even costs, as could Saudi Arabia, which has higher spending requirements, leading to increased borrowing for both.”