Saudi Arabia Issues First Negative Interest Rate Government Bonds Amid Bond Sell-Off 'Thanks to Oil Price Rise'

[Image source= AFP Yonhap News]

[Asia Economy Reporter Park Byung-hee] The Saudi Arabian monarchy has issued government bonds with a negative interest rate for the first time in history, the Wall Street Journal reported on the 24th (local time).

Amid a global sell-off in bonds due to expectations of economic recovery and concerns about inflation, there was a buying spree for Saudi government bonds. The WSJ analyzed that this reflected expectations that the Saudi monarchy’s finances would strengthen due to rising oil prices.

The Saudi monarchy raised 1.5 billion euros (approximately 2.0214 trillion KRW) by auctioning 3-year and 9-year government bonds on the day. The interest rates were -0.057% and -0.646%, respectively.

Last year, Saudi Arabia’s gross domestic product (GDP) shrank by 3.9% due to reduced energy demand caused by the spread of COVID-19. The International Monetary Fund (IMF) predicted that Saudi Arabia’s fiscal deficit would reach 12% of GDP last year.

The Saudi monarchy plans to reduce spending to lower the fiscal deficit ratio to less than half of GDP.

The reason for issuing euro-denominated bonds was also a measure considering the fiscal deficit. The European Central Bank (ECB) has applied negative benchmark interest rates since 2014. Thanks to this, issuing euro-denominated bonds allows for raising funds at a lower cost. China also issued euro-denominated government bonds with negative interest rates for the first time last year.

Saudi Arabia has consistently maintained investments in the global bond market since 2016. This is the second time it has issued euro-denominated government bonds.

Oil prices have rebounded sharply, rising nearly 30% since the beginning of this year. Accordingly, HSBC forecasted that Saudi Arabia’s GDP would grow by 4% this year.

On the same day, bond sell-offs continued in major countries’ financial markets.

The 30-year US Treasury yield surged by as much as 0.11 percentage points intraday, and the 10-year Treasury yield surpassed the 1.4% mark. It rose by up to 0.09 percentage points intraday to reach 1.43%. The Financial Times reported that the US 10-year Treasury yield exceeded 1.4% for the first time since the COVID-19 pandemic. In Europe, government bond yields in the UK, Germany, France, and Italy all rose, indicating a drop in bond prices.

The Bloomberg Barclays Multiverse Index, which reflects yields in the $70 trillion bond market, has fallen 1.9% so far this year. If the current trend continues, it will record the worst quarterly return since 2018.