The Middle East and North Africa are in the grips of a bond-sale fever as investors shrug off lower oil prices and razor-thin credit spreads in a hunt for yields.
The government of Kuwait is returning to international debt markets after eight years; Egypt mandated banks for dollar-denominated Islamic bonds; Algeria plans a sukuk for its nationals. Moroccan bonds rallied in the secondary market after S&P Global Ratings awarded the country the only investment grade in Africa.
All this buzz came after Abu Dhabi pulled off an unprecedented milestone last week — selling its 10-year dollar bond at a mere 18 basis points above Treasury yields. That spread was about 94% below the average risk premium for emerging markets.
Demand for the bond was driven by yield-focused, rating-sensitive local and Asian investors, resulting in the “tightest-ever 10-year tranche in all of emerging markets,” according to Fady Gendy, a fixed-income portfolio manager at Arqaam Capital Ltd. in Dubai.
The bond rush comes at an unlikely time for the region, which is home to many countries that rely on oil revenues to balance national budgets and fund infrastructure projects. Brent crude has dropped 7.6% this year, the worst showing since 2020.
But investors have also been talking about how the extra yield regional bonds offer over Treasuries has been shrinking to multiyear lows. JPMorgan Chase & Co.’s measure of Mideast sovereign spread fell to 250 basis points in July, the lowest since 2006.
While Mideast spreads are narrow, they still offer a better risk-reward than some Asian borrowers and lower-rated EM peers, Gendy said. Investors continue to make decent returns from coupons and market moves, he added.
Kuwait’s return to capital markets will depend on that appeal. The OPEC member is looking to issue a bond with tranches of three, five and 10 years. That follows a decision by the cabinet in March to approve a borrowing law that had been held up for years by political wrangling.
“Kuwait will benefit from scarcity value, considering this is the first Eurobond issuance since 2017,” Gendy said.
Egypt, one of the most popular countries among carry traders, began the process to issue three-year and seven-year dollar bonds. The country has a compelling macro story, underpinned by slowing inflation, rates going lower, higher foreign reserves and a stronger currency, Gendy said. The tightening of its spreads allows the government to lock in attractive borrowing costs, he said.
Algeria, a rare issuer, has only narrow coverage among EM credit investors, but its plan to raise 297 billion dinars ($2.3 billion) from its first-ever sovereign sukuk issuance is creating a buzz. The sale will be limited to Algerian nationals.
“Bringing sovereign deals to the market that are index-eligible will help put the country on the map and provide name diversification for investors,” said Gendy.
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