November 8, 2017 / 1:55 PM / a year ago

UPDATE 2-Middle East bond sell-off widens on Saudi, Lebanese tensions

* Saudi bonds fall across curve, Lebanon 2020 lowest on record

* CDS prices rise across affected Middle East countries (Adds analyst quote on Lebanon debt, Saudi bond investor background)

By Marc Jones and Davide Barbuscia

LONDON/DUBAI, Nov 8 (Reuters) - A sell-off in Middle Eastern bond markets escalated on Wednesday with debt prices in Saudi Arabia, Bahrain and Lebanon all touching long-term lows following Saudi Arabia’s anti-graft purge and government turmoil in Lebanon.

Some of Saudi Arabia and Bahrain’s dollar-denominated bonds fell to their lowest since January, while a number of Lebanon’s slumped to their lowest point since being issued as the turbulence spread.

This came as sources told Reuters that Saudi authorities had made further arrests in a swoop on alleged corruption among the kingdom’s political and business elite ordered by Crown Prince Mohammed bin Salman.

In the space of two years, the new Saudi leadership has sacked two crown princes, embarked on a military campaign in Yemen, blockaded fellow Gulf state Qatar and rolled back some of its onerous social restrictions.

But 16 months ago, the kingdom also presented an ambitious reform plan to diversify its economy away from oil.

Saudi international bonds were particularly hit at the long-end of the curve, where foreign investors concentrate their holdings.

When Saudi Arabia issued its latest $12.5 billion international bonds in September, the largest debt sale across emerging markets this year, almost half the notes were taken by American buyers with another $3.2 billion by European investors.

A Saudi $6.5 billion dollar bond maturing in 2046 fell a cent to the lowest since March at 97.493 cents, while the $4.5 billion 2047 bond was down more than one cent to a one-month low. .

Shorter-dated issues maturing 2023 and 2026 fell by around 0.3-0.4 cent too , according to Thomson Reuters data.

“It is just all the uncertainty,” Aberdeen Standard Investment’s Kevin Daly said. “We don’t have visibility, whether that is Saudi policy or ... who is going to be the next prime minister in Lebanon.”

Lebanon has been thrust back to the centre of regional rivalry between Saudi Arabia and Iran since the Saudi-allied Lebanese politician Saad al-Hariri quit as prime minister on Saturday, blaming Iran and Hezbollah in his resignation speech.

Saudi Arabia in turn has accused Lebanon of declaring war against it because of alleged aggression by the Iran-backed Lebanese Shi’ite group Hezbollah, a dramatic escalation of a crisis that may destabilise the tiny Arab country.

Lebanon’s June 2020 bond dropped 2.6 cents to 95.3 cents in the dollar, the lowest since the bond was issued in June 2013 according to Reuters data.

Its April 2020 issue also fell to its lowest ever level as it dropped 2.4 cents to 94.9 cents in the dollar.

Lebanese bond yields widened the most on the short end of the country’s debt curve, an indication that short-term political risk was pushing some investors to sell the paper.

“If you think of the yield as being the measure of risk, in the past, as is usually the case, short-dated Lebanese debt was seen as less risky than longer dated paper. Now, the curve is flat – it’s all equally risky,” said Carmen Altenkirch, emerging market sovereign analyst at Axa Investment Managers.

“Yields could come down, if a new prime minister is found quickly and the government can get back to business, but this doesn’t appear to be likely in the short term.”

Bahrain’s bonds were caught in the cross-currents too and the cost of insuring exposure and against a default in all of the countries involved was on the rise.

The cost of insuring exposure to Lebanese and Saudi Arabian debt hit the highest since late 2008 and July this year, respectively.

Lebanon, which was thrown back into political limbo by the resignation of Saudi-backed Prime Minister Saad al-Hariri, saw its five-year credit default swaps (CDS) jump 13 basis points (bps) from Tuesday’s close to 592 bps.

Rating agency Moody’s warned on Tuesday that reopening Lebanon’s political vacuum would damage its credit rating.

Saudi Arabia’s five-year CDS meanwhile hit 100 basis points, its highest since late July. (Reporting by Marc Jones in London, Davide Barbuscia in Dubai, Lisa Barrington in Beirut, Claire Milhench and Karin Strohecker in London; editing by Mark Heinrich)

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