UPDATE 2-Tanker attacks cause jitters among Gulf bond investors

International bonds issued by Gulf Cooperation Council (GCC) states weakened on Thursday after two tankers were hit in suspected attacks in the Gulf of Oman, a month after a similar incident in which four tankers in the region were struck. Regional debt markets did not react to the May attacks - when oil tankers were hit off the Fujairah emirate, one of the world's largest bunkering hubs - but their weakness on Thursday showed the latest incident was making investors jittery.

Details of the tanker incident were not immediately clear, but oil prices surged 4%, as the suspected attacks came amid increased tensions between Iran and the United States over Tehran's nuclear programme. "Even if direct conflict is ultimately avoided, heightened geopolitical tensions will continue to act as a headwind to local financial markets," said Jason Tuvey, senior emerging markets economist at Capital Economics.

"So long as tensions remain elevated, investors are likely to demand a higher risk premium to hold assets in the region." Saudi Arabia's bonds due in 2049 were down over 0.6 cents in early trade while $3 billion in bonds issued by state oil giant Saudi Aramco, also due in 2049 , were down by roughly 1 cent on the dollar, according to Eikon Refinitiv data.

The price drop, however, started to ease later in the day and regional credit default swaps - which indicate the cost of insuring against a default - were fairly stable, with only Saudi Arabia up by one point early in the morning, IHS Markit said. GEOPOLITICS

"This looks like a knee-jerk reaction," said a Gulf analyst, who asked not to be named. "The market is very sensitive to geopolitical developments." Regional stock markets were also in the red, with a missile strike by Yemen's Houthi rebels on a civilian airport in southern Saudi Arabia on Wednesday also weighing on risk sentiment.

The tensions have hit regional stock markets at a time of strong performance, with Saudi Arabia in particular enjoying money inflows as it entered the MSCI emerging market index last month. The Saudi main exchange, Tadawul, was down 1.5% on Thursday. The index is still up 14% so far this year, making it one of the Gulf's best performing markets. The Gulf of Oman lies at the entrance to the Strait of Hormuz, a major strategic waterway that is a conduit from Middle East producers for a fifth of global oil consumption.

S&P Global Ratings said in a research note this week that if diplomatic and military tensions escalate to the point of threatening a blockage of the Strait, this could lead to an increase in Gulf sovereigns' funding costs, and to a disruption in foreign direct investment. But the agency said it had not changed any of its ratings or its outlooks for Gulf governments.

(Reporting by Davide Barbuscia and Saeed Azhar Editing by Gareth Jones)

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