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Price ME with fatigue in mind

Gulf Co-operation Council bond issuance hit a year-to-date record this week, boosted by the whopping $9bn bond from Qatar. Emerging markets bankers are right to be nervous about how much more investors can take but finding out need not be traumatic.

Noor Bank and DP World, both printed on Tuesday, and were trading half a point down in the secondary by Thursday despite the oil price hitting over $50 a barrel for the first time this year. The five and 10 year tranches of the Qatar bond also struggled by a similar magnitude.

Deals from the region have so far been priced with skinny new issue premiums. Even Qatar’s record breaker paid only 10bp across each tranche. But the lacklustre secondary performance of Middle East notes priced this week suggests the time is coming where issuers may have to offer more given how much volume is expected from the region.

Sovereigns may find it easier to keep a lid on premiums because they are rarely spotted in international bonds, but with over 10 times the supply expected this year versus last, even that is not certain. Banks and corporates will find it harder still.

But higher premiums are not a sign of failure, despite the obsession with this metric typical of those in EM bond markets. They are an inevitable consequence of higher volumes, which will remain so all the time oil prices are depressed. That could be a while.

It will be far better to adjust premiums now and enjoy more fruitful engagement with a group of investors upon whom the Middle East borrowers need to keep sweet for a long time to come.

Paying the right premium — not the meanest — must be the priority from now on.

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