RE: Saudi rates and CDS
Saudi Rates and CDS
Chart 1 below shows the spread between Syr Saudi and Syr US swap rates. As the country begins to face a budget shortfall, it's possible the government will have to start issuing more debt and therefore putting pressure on rates. The spread has already widened 50bps to 92bps.
Chart 2 below shows Saudi CDS
Syr Saudi CDS
Paul Barrett | Managing Director | Global Investment Opportunities Group | J.P. Morgan Securities LLC | J.P. Morgan Private Bank | J.P. Morgan Chase Bank N.A.
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S&P cut Saudi Arabia from A+ to AA- earlier this week as they expect the fiscal deficit will increase to 16% of GDP in 2015, from 1.5% in 2014, primarily reflecting the sharp drop in oil prices. As a follow-up to the below, it is also interesting to look at playing the idea through FX.
USD/SAR is currently pegged. While our base case is that the government will defend the peg, if headlines get worse, revenues collapse from depressed oil prices and the government has to address fiscal spending, we believe forward points and volatility will continue to increase. Although it may be a low probability event that the government breaks the peg, if we look at Kazakhstan's actions in August (see chart below), we see buying USD call/ SAR put options as an interesting risk reward.
USD/KZT 1yr
Source: Bloomberg 11/05/2015
Nicole Wolf I J.P. Morgan Securities LLC I J.P. Morgan Private Bank I JP Morgan Chase Bank, N.A. I 320 Park Ave, Floor 14, New York, NY 10022 I T:
NOT AN OFFICIAL CONFIRMATION: For informational purposes only. This report does not represent an official account of the holdings, balances, or transactions made in your account and is being provided at your request. Please refer to your monthly account statement for the official record of all of your account activities. For question, please call your J.P. Morgan representative.
In discussion of options and other strategies, results and risks are based solely on hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or option-related products in general, as well as the products or strategies discussed herein are suitable to their needs. In actual transactions, the client's counterparty for OTC derivatives applications is JPMorgan Chase Bank, N.A., and affiliates. For a copy of the "Characteristics and Risks of Standardized Options" booklet, please contact your JPMorgan Advisor.
This email is confidential and subject to important disclaimers and conditions including on offers for the purchase or sale of securities, accuracy and completeness of information, viruses, confidentiality, legal privilege, and legal entity disclaimers, available at http://www.jpmorgan.com/pages/disclosures/email.