The Impact of Rising US Bond Yields on Kuwait

“Kuwait Faces High Cost of Capital” The cost of capital may begin with a number flashing on a screen in Washington, but it ends with a decision in Kuwait: a project is delayed, an expansion is recalculated, and a job opportunity waits. Therefore, rising U.S. Treasury yields are not merely a concern for investors; they strike at the heart of our ability to finance the economy and mobilize its capital.

On October 8, the yield on the 10-year U.S. Treasury note reached 5.22%, while the 30-year note hit 5.60%.

Although these yields retreated to 5% and 5.31%, respectively, on October 26, keeping yields at these levels intensifies competition for capital and raises the required return threshold for accepting investment risks.

To translate this into a direct example: a company with KWD 100 million in financing faces an additional annual cost of KWD 1 million if the cost of capital rises by one percentage point, assuming the financing amount remains constant. If its annual profits are KWD 5 million, this increase alone consumes 20% of its profits, before accounting for any other pressures.

The impact does not affect all companies simultaneously; new financing is affected at pricing, variable-rate financing is affected according to repricing dates, while pressures on fixed-rate financing emerge upon renewal or refinancing. This gradual progression demands early preparedness, as the calmness of today’s budgets does not mean the absence of more costly obligations tomorrow.

In Kuwait, pressures may come from two sides: rising costs of financing local activity, and the potential impact on oil demand if the global economy slows. Conversely, higher yields offer opportunities to improve returns on new investments in debt instruments. Therefore, the net balance must be evaluated between what invested funds earn and what the economy pays to obtain financing.

On March 26, the Central Bank of Kuwait implemented a package of measures to address geopolitical developments, including easing certain liquidity requirements, raising limits on financing facilities, and releasing part of its capital hedging reserves. These steps grant banks greater flexibility to support economic activity, without implying that they are solely attributable to rising U.S. yields.

At the banking level, Boubyan issued sukuk worth KWD 90 million, settled on September 17, while Warba announced the completion of issuance and settlement of KWD 80 million in sukuk on October 27, following prior approval for issuance up to KWD 100 million. Thus, the total value of these two executed issuances amounts to KWD 170 million to strengthen capital. This figure reflects the ability to attract financing, but it does not mean the entire amount will be converted immediately and fully into new loans.

A company may possess assets and book profits, yet still encounter difficulties because its receivables have not been collected on time.

Rising yields do not condemn Kuwait to recession, but they increase the cost of delaying decisions. The strength of the banking sector is a crucial asset, whose value is fully realized when its effects reach the real economy. The economy does not move solely based on the volume of money in accounts; rather, it depends on the ability of that capital to finance projects, settle obligations, and create job opportunities.