Kuwait’s $8 billion debut international bond issue traded close to Abu Dhabi bonds in the secondary market on Tuesday, suggesting the Gulf's gold standard for sovereign debt now has competition for investors' attention.
On Monday, Kuwait's government sold $3.5 billion of five-year bonds and $4.5 billion of 10-year debt. Orders for the issue totalled a massive $29 billion, bankers said.
By Tuesday, the five-year bond had tightened to yield 2.85 percent, compared to 2.88 percent at issuance, while the 10-year was yielding 3.56 percent against an initial 3.62 percent.
That put Kuwait inside the secondary market yields of similar bonds issued by Qatar's government and only slightly wide of Abu Dhabi, which was previously considered the safest credit in the region.
Abu Dhabi’s five-year paper maturing in 2021 was yielding 2.57 percent on Tuesday while its 10-year, 2026 notes were at 3.39 percent. For comparison purposes, traders added between 10 and 15 basis points to those yields to account for the Abu Dhabi paper's shorter time to maturity.
Kuwait's government, one of the region's strongest financially, had previously indicated it would borrow up to about $10 billion internationally. But a partial recovery of oil prices over the past few months reduced its need to borrow.
The International Monetary Fund projects Kuwait will be the only one of the six Gulf Cooperation Council States to run a fiscal surplus this year.
However, Kuwait’s decision to make a sizeable bond issue now made sense in the context of an expected interest rate increase by the U.S. Federal Reserve later this week, and given expectations for more hikes this year, some fund managers said.
Given the tight pricing of the bond issue and the fact that Kuwait may not need to issue again for a long time, some managers suggested the Kuwaiti paper could become relatively illiquid, with Asian investors likely to buy and hold the 10-year paper and regional accounts doing the same for the five-year.
Citigroup, HSBC and JP Morgan coordinated the deal. Kuwait is rated AA by both Fitch and Standard & Poor's.
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