SAUDI Arabia’s state oil giant drew record demand for its debut bond issue. A month on, the debt has hit a rough patch.

Yields on the debt of Saudi Arabian Oil Company, or Aramco, have drifted up in recent weeks, with its 10-year bond yield rising to 3.77% from 3.55% at issue in early April. A similar pattern is seen across the company’s bonds with different maturities.

The increase in yields is in contrast to its peers. Bonds maturing in 2025 issued by Exxon Mobil , among the multinational oil majors Aramco sought to compare itself to when it was selling the bonds last month, have dipped to 2.54% from 2.86% in the same period. A 2026 dollar bond issued by Petronas, the state-owned Malaysian oil company, has drifted down to 3.35% from 3.47%.

Aramco tapped international bond markets for $12 billion last month after receiving some $100 billion in orders.

Rather than targeting specialized emerging market investors, many of whom already hold Saudi Arabian government debt, Aramco pitched its bonds to broader debt investors, according to investors close to the deal.

Anthony Simond, an investment manager focused on emerging market debt at Aberdeen Standard Investments, bought the bonds last month and has held on to them.

“You have probably had a few sellers, geopolitics hasn’t been great and markets in general haven’t been great,” Mr. Simond said, adding that he is waiting to see how the debt performs in a “good” market. Trade tensions between the U.S. and China have weighed on emerging markets in recent weeks.

Aramco bond holders have also absorbed news of fresh clashes in the Middle East. Two Saudi Arabian oil tankers were attacked near the Strait of Hormuz this weekend and the kingdom stopped pumping on a major oil pipeline run by Aramco on Tuesday following a drone attack.

Pressure on Aramco bonds, however, began before the skirmishes in the region broke out. Many emerging market investors argue they were overpriced, amidst market excitement around the debut issuance.

The 10-year Aramco bonds began trading at a lower yield than bonds issued by the government, an unusual role reversal. Investors generally consider a government’s bonds safer than state-owned companies.

That unusual situation has almost completely unwound. The 10-year Aramco bonds now yield 0.05 percentage points below similar Saudi state bonds, compared with 0.18 percentage points below the government when the Aramco bonds were issued.

Peter Kisler, a portfolio manager at North Asset Management in London, who decided not to buy the bonds last month on the view they were overpriced, remains skeptical. “I wouldn’t even call this ‘fair value’ now,” he said.

Yacov Arnopolin, emerging-markets portfolio manager at Pimco, says that Aramco having to disclose details about how much money it makes has helped investors get more comfortable with the central government debt.

“We always knew that one of the big sources of cash for the sovereign was their quasi-sovereign oil company but it was a guess because the financials were always a mystery,” said Mr. Arnopolin, who also decided not to buy the debut bonds last month. “Now it is in the open.”

Aramco’s detailed financial statements published ahead of last month’s issuance revealed it is the world’s most profitable company, topping Amazon, Alphabet and Facebook.

The Saudi Arabian government has sold close to $60 billion in bonds in the past three years as the government grapples with lower oil prices and tries to diversify its economy into new sectors. The kingdom tapped debt markets in January, months after the killing of journalist Jamal Khashoggi stoked widespread criticism.

Days after the Aramco issuance closed with record orders, Saudi Arabia’s sovereign-wealth fund, the Public Investment fund or PIF, announced plans to tap debt markets for billions of dollars later this year to help fund the state’s ambitious reform program. - WSJ

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