Saudi Arabia Doesn’t Need to Go All In to Spur a Record Bond Rally

(Bloomberg) -- When Saudi Arabia vows to go “all the way” for a country in need, the rest is just noise for investors.

A day after Lebanon’s bonds sank following a credit rating downgrade by Moody’s Investors Service, a show of support by Saudi Arabia was enough to undo the damage. With the kingdom’s regional rival Qatar also agreeing to throw a $500 million lifeline to Lebanon earlier this week, its dollar bonds due 2028 jumped the most ever on Wednesday, despite the Saudi finance minister skimping on details in a pledge made on CNBC.

Even if Saudi Arabia is all talk for now, investors know the kingdom can easily back it up with action. Bahrain’s battered bonds recovered to become the best performer in the Persian Gulf last year after Saudi Arabia and other wealthy allies came to the rescue in October with a $10 billion package.

“There are parallels” with Bahrain, said Richard Segal, a senior analyst at Manulife Asset Management in London.

Saudi Arabia Doesn’t Need to Go All In to Spur a Record Bond Rally

Lebanon’s bonds slumped on Tuesday after Moody’s lowered the country’s credit score to seven levels below investment grade. Even though the nation’s caretaker government has disavowed any debt restructuring, recent official comments suggest “a growing urgency” that coping with one of the world’s biggest debt burdens might prompt measures resulting “in a default event under Moody’s definition,” the rating company said.

Qatar’s decision to buy $500 million of Lebanese bonds “is not enough to arrest the overall deterioration,” said Carla Slim, an economist for Standard Chartered Plc in Dubai. But “it is a positive turn of events, particularly combined with Saudi Arabia’s verbal show of support for Lebanon.”

The nation’s bonds and the cost to protect them from default have already recouped losses sparked this month when its caretaker finance minister told a newspaper the government was considering restructuring its debt.

The bonds due 2028 advanced further at the open after a record price gain Wednesday, when the yield declined almost 80 basis points. Five-year credit-default swaps plunged 9.2 percent Wednesday, its biggest drop since April 2017, to around 800 basis points.

The rally will only last if the country forms a new cabinet, Segal said. Eight months on from an election, Lebanon remains without a government and with billions of dollars in aid untapped as politicians continue to squabble. Parliament Speaker Nabih Berri said he hopes caretaker Prime Minister Saad Hariri will form a government in less than a week, the state-run National News Agency reported Tuesday.

The difference with Bahrain is that Saudi Arabia has “more leverage and more economic affinity” with the island kingdom, and Lebanon’s poor “fundamentals are still relevant,” according to Segal.

“Yields remain high for example, but technical factors are stepping up,” he said.

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