Oil and politics to drive Iraq debt yields

By Jack Kimball

BAGHDAD (Reuters) - Iraq's sovereign bond yields are likely to creep up as the world's 11th largest oil producer heads to a January vote, but if the poll goes well, yields will return to tracking oil prices, production and global markets.

Risk appetite is returning to emerging markets as the global economy recovers and support for the markets from multilateral lenders kicks in. The recovery has fed into a better performance across the board for emerging markets.

Iraq is gearing up for parliamentary elections next year that will be seen as a crucial test for its nascent democracy, and the poll will be keenly watched by investors and oil majors striking deals to tap the world's third largest oil reserves.

"There is scope for political noise and statements to undermine sentiment and affect the bond price. That might be a transitory thing," said Stuart Culverhouse, chief economist at frontier markets brokerage Exotix.

"(After the election) If there was some sense that it was durable, then the attention would begin to focus on the oil prospects, oil prices and production."

Iraq sold a $2.7 billion (1.6 billion pound) global bond of restructured commercial claims in 2006, which were left over after the ousting of dictator Saddam Hussein in 2003 by U.S.-led troops. The bond matures in 2028, has a 5.8 percent coupon and starts paying back principal from 2020.

The Eurobond's yields spiked in late 2008, hitting around 16 percent on the back of fallout from the global financial crisis, but have since come back down to around 9 percent.

In Iraq, instability has largely deterred foreign investors, except in the oil sector, but a drop in violence in the last two years and prospects of a more inclusive election should ease some fears. Bloodshed, however, remains common.