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GCC debt issuance picked up in third quarter of 2017 (Q3, 17) as the typically slower summer season came to an end. Activity remained predominantly in the public sector.
Total new issuance amounted to $24bn compared to $21bn in Q2,17. Private sector activity continued to weaken in third quarter, with the share of sovereign issuances up to 94 percent. Total outstanding debt was up a healthy $20bn, to rest at $415bn.
After reaching a high of 3.3 percent on the back of the blockade, yields on Qatar’s bonds maturing in 2021 fell to 2.8 percent at the close of Q3. Yields on Omani paper maturing in 2021 also declined in the third quarter to end at 3.5 percent after having reached 3.9 percent in the previous quarter following the sovereign’s downgrade to below investment-grade by S&P, NBK’s ‘Debt Market’ report noted.
Sovereign activity was strong during 3Q17 with $23bn in new issuances and the bulk coming from Saudi Arabia. Bahrain tapped international markets for the second time this year with a $3bn issuance. Despite Bahrain having a rating below investment-grade by the three main rating agencies, the offering was well received and almost five times oversubscribed, reflecting the strong appetite and increased attractiveness of the regional debt market. Saudi Arabia and Kuwait issued domestic debt of $11bn and $4bn, respectively.
GCC debt issuance is expected to remain healthy in Q4,17, as sovereigns continue to seek cheap deficit financing in favorable market conditions. In early October Saudi Arabia raised $12bn in dollar-denominated debt almost a year after its debut international issuance. Abu Dhabi also just completed a $10bn international offering.
International benchmark yields trended downward for most of the quarter as North Korea worries benefitted safe haven assets. Persistently low inflation in the major economies also continued to put a cap on yields.
However, most yields ended the quarter slightly higher following a more hawkish tone by Fed Chair Janet Yellen and the unveiling of President Trump’s pro-business tax plan late in the quarter.
US government 10-year Treasury yields trended lower for most of 3Q17 but finished 2 bps higher at 2.3 percent.
Tensions with North Korea spurred a generally “risk-off” mode, exerting downward pressure on yields. Demand for safe-haven assets also picked up as hurricanes hit the US coast. But yields recovered shortly after as the impact turned out to be less than was previously feared. Yields took a detour thereafter, pushed higher mostly by the Fed’s more hawkish stance. Towards the close of the quarter, yields shot up as investors digested the latest iteration of Trump’s tax plan and Yellen’s unwavering pursuit of monetary tightening.
Market expectations for a rate hike in December rose to 80 percent from 25 percent just a few weeks earlier following September’s FOMC meeting in which they announced the start of the balance sheet reduction process.
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