Investors in the Gulf are heading for a shake-up: these are the things to pay attention to
While eyes are turned to the security tensions, the Swiss bank EFG reveals the main factor that is wiping out billions and explains why some countries in the region are in much greater danger than others.
The bond market of the Gulf countries has been dealing with a series of challenges recently, but contrary to the impression that might be created against the backdrop of the security tensions in the region, it is actually the developments in the US market that provide a central part of the explanation for the performance. Michael Leithead, head of the bond division at the Swiss bank EFG, analyzes the trends and presents a complex picture for investors.
Since the beginning of the year, bonds of the Gulf countries have underperformed relative to bonds in the US and emerging markets. However, EFG estimates that the main reason is not a significant increase in the credit risk of the countries, but mainly the rise in US government bond yields.
The data illustrates the gap. The risk spread in the Bloomberg index for dollar-denominated bonds of Gulf countries with an investment grade has widened by only about 8 basis points since the beginning of the year. At the same time, US government bond yields rose by 50 to 60 basis points. This increase deducted about 3.6% from the Gulf bond index, which ultimately showed a lag of about 0.5% compared to bonds with a similar rating in developed and emerging markets.
The tension with Iran also affected the market, but mainly in the short term. At the peak of the escalation in mid-March, the gap compared to US corporate bonds jumped to about 55 basis points. Since then, the reaction has moderated, and the additional yield has dropped to about 23 basis points, a level close to the average recorded since the end of 2023.
One of the key findings in the analysis is that the Gulf countries should not be treated as a uniform economic bloc. According to EFG, most countries in the region enjoy a stable financial situation and high solvency, partly thanks to relatively low debt levels and significant volumes of assets.
Moody's data cited in the analysis points to an expected debt-to-GDP ratio at the end of 2025 of 22% in Abu Dhabi, 32% in Saudi Arabia, and 43% in Qatar.
Alongside this, there are significant differences in the level of exposure to trade routes. Saudi Arabia is considered more resilient because it can divert some of its activity to ports on the west coast. In contrast, Qatar and the UAE are more exposed to the situation in the Strait of Hormuz.
The sensitivity to the Strait of Hormuz does not end at the country level and also affects companies. Companies from the UAE operating in the fields of shipping, trade, and real estate have also underperformed. EFG estimates that the stabilization of traffic in the strait could be particularly beneficial for these issuers and sectors.
Despite the financial stability, forecasts for 2026 point to the possibility of weaker growth and an increase in deficits. Such a situation could lead the Gulf countries to increase the volume of their debt issuances.
The implication for investors is that even without a deterioration in the financial situation of the countries, an increase in the supply of bonds could cause investors to demand higher yield spreads.
EFG concludes that the three main variables to watch are the interest rate in the US, the sensitivity of Gulf bonds to changes in US yields, and the degree of exposure of each country or company to trade routes.
Therefore, the message to investors, including Israeli investors, is not necessarily to purchase the entire Gulf bond index, but to examine the various countries, sectors, and issuers individually. In other words, precisely in a period when spreads have already narrowed, selective selection may be more significant than sweeping investment in the entire region.
