GCC debt markets hit the brakes as geopolitical risk spikes

GCC borrowers have effectively frozen new USD bond and sukuk sales as regional markets price at a war premium following the outbreak of the conflict with Iran, Fitch Ratings says. After a record-breaking start to 2026, the regional pipeline is now on hold despite the total outstanding debt market hitting a record USD 1.2 tn this month — a 14% y-o-y increase.

REMEMBER- The GCC had significant funding needs going into 2026, as GCC governments and issuers look to diversify funding channels and refinance maturing debt. Regional debt markets had been on track to break the USD 1.25 tn mark this year, up from USD 1.1 tn in issuances last year, according to Fitch Ratings’ GCC Debt Capital Markets MENA Monitor 2026 report (pdf).

Why it matters: The GCC now accounts for 40% of all emerging-market USD issuance (excluding China), making it the primary engine of EM debt. While yields widened 28-32 bps in the conflict’s first ten days, CDS remained remarkably resilient, widening by only 13 bps for Abu Dhabi and 12 bps for Saudi Arabia, according to a Mashreq Capital note (pdf).

Real estate among the first to show signs of trouble: “While higher-quality sovereign and quasi-sovereign credits continue to trade in an orderly manner, weaker high-yield issuers, particularly in real estate, have seen a marked deterioration in market depth,” Mashreq Capital notes, citing bid-ask spreads that have widened to around 2 points versus the usual 0.5, pointing to limited buyer appetite.

Sukuk continues to offer a volatility hedge: Heavy demand from Islamic banks is keeping sukuk spreads tighter than conventional bonds, giving regional issuers a pricing edge even as high-yield benchmarks (like the S&P High Yield Sukuk Index) see yields rise toward 6.61%.

Looking ahead, Mashreq Capital sees three potential scenarios: A diplomatic de-escalation could quickly unwind the war premium, tightening spreads and reopening the issuance window, according to Mashreq Capital. A more prolonged standoff would likely keep spreads elevated and push CDS ins. costs higher, effectively raising borrowing costs for regional issuers. In a worst-case scenario, markets could face a broader liquidity shock, forcing selloffs even in high-quality sovereign debt.

MARKETS THIS MORNING

Asian markets took a tumble this morning as oil prices remained elevated and comments from US President Donald Trump and Iran’s new supreme leader, Mojtaba Khamenei, gave little hope for a near end to the war. Honda’s shares fell over 6%, dragging Japan’s Nikkei down 2%, after the automaker said it expects its first annual loss in almost 70 years. South Korea’s Kospi was also down almost 3%, while Hong Kong’s Hang Seng was also down in early trading.

Wall Street futures, meanwhile, were slightly higher as investors await US inflation data later today.

The values in the table above are listed according to the market position as of 3:30pm IST / 2pm GST.