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Do you remember where you were when China issued a three-year US dollar bond at just one basis point over US Treasuries? Probably not, unless you are a bond market nerd, but it was in November last year.
It foreshadowed a trend this year for the bonds of top-rated governments in emerging markets to trade at the lowest premium over US government debt since before the global financial crisis. (As for some less than highly rated ones, well.?.?.)
Maybe this is nuts. Maybe this is an EM-DM convergence trade as bond markets across the Western world are going a little bit ‘submerging’. Maybe investors just want to lock in relatively high underlying yields on bonds in the market now before more Fed cuts might feed into new issuance.
Whatever is driving tighter spreads, there was another interesting emerging-market dollar bond milestone this week.
Abu Dhabi sold $2bn in 10-year bonds at a spread to US Treasuries of just 18 basis points on Thursday (and a coupon of 4.25 per cent). It traded a bit tighter on Friday.
That seems to be a record-low issuance spread for this maturity, and maybe not just in emerging market sovereign terms. Ten-year debt is also a bit of a bigger deal in benchmark terms. Countries like Abu Dhabi and China don’t really need to get dollars from issuance, but they do want to build benchmarks for future debt sales.
“The 10-year pricing at Treasuries plus 18 basis points is in our estimation the tightest 10-year spread we have seen, certainly in emerging markets, and even in the US investment-grade market we are struggling to find one that has priced tighter this millennium,” says Hussain Zaidi, global bond syndicate head at Standard Chartered, who worked on the deal.
We are also looking for a 10-year US investment-grade bond that was issued at a spread tighter than 18 basis points in the past — possibly something like the Illinois Bell Telephony Company, far off in the mists of time? — and we would welcome any pointers.
A few multilateral development banks have meanwhile issued 10-year bonds at tighter than 18 basis points this year, including the World Bank, European Investment Bank, and Asian Infrastructure Investment Bank.
In any case, 18 basis points is not much when a high-grade US issuer like Johnson & Johnson currently trades at 33 basis points, for instance.
“Credit spreads are at tight levels globally at this point in time — bond markets are in a purple patch here,” Zaidi adds. “The Abu Dhabi government has been issuing in the market for many years and they saw the opportunity to issue at very tight spreads.”
Demand for the Abu Dhabi bond was $11.5bn (it also had $7bn in bids for $1bn in three-year paper). Sixty per cent of demand came from Asia and the Middle East.
That tallies with what we often hear about the Gulf bid for these kinds of bond. The Chinese bond sale last year was arranged out of Saudi Arabia, which is itself now a massive issuer in emerging markets.
Again, nuts? Maybe.
But don’t be surprised if someone tries to beat Abu Dhabi’s record soon.
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