Your AMs/PMs want to buy new Saudi Aramco bonds? Have them consider alternatives

2 minute read

Saudi Aramco appears to be close to issuing bonds again. We think putting money into Aramco shareholders pockets is not a particularly good idea, especially since it seems quite straightforward to replicate the risk-return profile of Aramco bonds without the potentially negative ESG reputational and real impact.

We rarely like bond investments with the sole purpose to fund payments of large dividends, and we are of the view the E, S, and G credentials of Aramco are not advantageous. However, we realise that there will be discussions across more than a few teams if the risk-return potential in buying Aramco bonds should outweigh potential reputational downsides and negative ESG impact.

We can illustrate how the Aramco 4.45 2039 bonds have been trading almost exactly in line with the CDX.EM index. The correlation once we switch out to a weekly sampling frequency is quite strong. Considering that CDX.EM is considerably more liquid than cash bonds and has little need for duration hedging (for investors who trade on a spread basis), this suggests that the index could be a good replacement. Indeed, when going through a more technical analysis, we find few compelling arguments to own the bonds rather than the index.