DUBAI- Qatar started marketing on Wednesday a U.S. dollar-denominated bond issue which is expected to attract hefty demand, the latest indication of how the country has overcome a boycott imposed by some of its Arab neighbours.

The debt sale, split into tranches of five, 10 and 30 years, will end later on Wednesday, according to a document issued by one of the banks leading the deal and seen by Reuters.

"I can imagine that they might issue between $7.5 and $12.5 billion. I think they will decide on how the books will develop. If there is heavy over-subscription like it was in April last year, then a larger deal will be likely," said Sergey Dergachev, senior portfolio manager at Germany-based Union Investment.

Orders for the bonds topped $25 billion while the deal was being marketed. Sources previously said the deal could go as high as around $10 billion. 

The five-year notes are offering an initial price guidance around 110 basis points over US Treasuries. The 10-year and the 30-year debt offers around 160 bps and 200 bps over the same benchmark.

"The price guidance looks attractive as of now, with some 30 basis points of new issue premium, but in the end I expect 10 to 15 bps of premium maximum left," Dergachev said.

Barclays, Credit Agricole, Credit Suisse, Deutsche Bank  , QNB Capital and Standard Chartered have been hired to arrange the five- and 10-year notes, the document showed.

The Taiwanese branches of Credit Agricole, Deutsche Bank and Standard Chartered are joint bookrunners for the 30-year tranche, which is a Formosa bond - a type of debt security sold in Taiwan by foreign issuers and denominated in currencies other than the Taiwanese dollar.

Qatar, the world's largest exporter of liquefied natural gas, rated Aa3 by Moody's, and AA-(minus) by S&P and Fitch, does not need to raise financing. It forecasts a budget surplus of 4.3 billion riyals ($1.18 billion) in 2019, partly because of higher oil prices.

But improved market conditions, and the recent inclusion of Qatar and other Gulf countries in JPMorgan's emerging-market government bond indexes might have prompted the sovereign to take advantage of global investor demand for Gulf debt.

"The timing is right to issue the bond," Dergachev said.

Also, more than $10 billion in Qatari debt is due next year, so a large debt sale could be used to pre-fund those maturities.

"I think it's a little surprising that they are coming to market with a very large issue, given the limited budget financing needs," said Timothy Ash, senior emerging markets strategist at Bluebay Asset Management.

"I guess this is in response to GCC index inclusion, and a response to increased demand for the region’s debt. This might be a broader regional trend which might cap any spread compression from GCC index inclusion, if it is just met by increased supply."

Last year Qatar raised $12 billion through a similarly structured bond deal, outdoing an $11 billion debt sale by Saudi Arabia. 

That deal was Qatar's first test of international investor demand after a boycott imposed by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt. They severed diplomatic and transport ties with Qatar in June 2017, accusing it of supporting terrorism, which it denied.

Partly thanks to rising energy prices, Qatar has largely overcome the economic impact of the boycott.

"Qatar is seen as an improving credit story – they have responded well to the economic blockade, pushing on with structural reforms, diversifying their trade, and improving their resilience," Ash said.

($1 = 3.6400 Qatar riyals)

(Reporting by Davide Barbuscia; Editing by Larry King) ((; +971522604297; Reuters Messaging: