The Emirate of Abu Dhabi’s super tight bond pricing last week — which included a 10 year tranche reoffered at a record breaking 18bp over US Treasuries — has raised the question of whether the bid for high grade dollar bonds from non-US issuers is big enough for an EM bond, most likely from a Gulf sovereign, to be priced inside Treasuries.
This is, of course, less of a reflection on perceptions of US public debt and creditworthiness — although they doubtless play some part as will the volumes that the US government issues, which dwarfs what is issued in the Gulf — and more a consequence of technical factors.
Abu Dhabi carries zero risk-weighting for Middle East banks and is considered a risk-free asset — just like Treasuries but arguably with the benefit of greater local appeal.
International investors will be aware of that and will be happy to ride on the locals' coattails, in the same way they will buy sukuk at a tighter credit spread than a comparative conventional bond, knowing scarcity of supply and a strong structural local bid will drag the debt tighter.
There is an argument, however, that it is technicals that may also obstruct an EM sovereign, even a high grade one, from pricing through Treasuries.
In the search for safe haven assets, investors will pay a premium for the abundant liquidity available in the US Treasury market compared to much smaller EM sovereign ones.
Nonetheless, volatility in US Treasuries in recent years has been higher than usual. That has driven some investors into alternative investments, benefitting high grade dollar bonds issuers, even if the Middle East — the region where the tightest trading credits are — have had to contend with a war on their doorstep that has at times risked regional escalation.
Doubtless there will be issuers out there looking to be the first to reach such a prestigious pricing landmark. In pursuit of that goal, they will rely heavily on local demand — which raises the question of why they would need to tap the international market in the first place — but surely the prize is too great for one not to try. The real question is not if, or even how, but when.
Opinions vary. One source said he thought an EM sovereign could price through US Treasuries in the next quarter, driven by competitive spirit alone.
We may all be in the gutter but some of us are looking at the stars and stripes — and are keen to price through them.