Yields on Gulf sovereign and corporate debt have surged to their widest spreads in five years, as tensions surrounding the Iran conflict drive a sharp reassessment of regional risk, according to Fitch Ratings. The agency highlighted that many GCC US dollar-denominated sukuk and bonds have widened significantly since the onset of the war, reflecting heightened investor concern.
This increase in spreads has exceeded the volatility seen during recent geopolitical and trade-related shocks, although it remains below the extreme levels experienced during the Covid-19 pandemic. The shift underscores how sensitive regional debt markets are to geopolitical developments.
Data compiled by S&P indices shows a broad repricing across MENA fixed-income markets. The yield to maturity on the S&P MENA Sukuk Index rose by 69 basis points over the past month to 5.15% as of March 27. Meanwhile, the corresponding bond index climbed by 64 basis points to 5.37%, indicating a widespread increase in borrowing costs across the region.
The pressure has been most severe in riskier segments of the market. Yield widening has been particularly pronounced among speculative-grade instruments, with the S&P GCC High Yield Sukuk Index jumping by 194 basis points to 7.76%, reflecting increased risk aversion among investors.
Despite the broader sell-off, sukuk instruments have continued to outperform conventional bonds. Fitch noted that MENA sukuk are trading at tighter spreads, supported by sustained demand—especially from Islamic banks—demonstrating the relative resilience of Sharia-compliant financial instruments during periods of market stress.
Primary market activity has also shifted as borrowing costs rise. Dollar-denominated debt issuance has slowed, while alternative funding channels such as syndicated loans and certificates of deposit have gained traction, indicating a temporary move away from traditional capital markets.
The widening in spreads has surpassed levels seen during earlier regional instability, including tariff tensions in 2025 and previous geopolitical escalations. However, Fitch emphasized that the Covid-19 pandemic remains the most disruptive period in recent history in terms of market impact.
Liquidity conditions have weakened since the conflict began, although they remain broadly stable overall. Fitch also noted that around 84% of rated GCC sukuk are still investment grade, with 90% of issuers maintaining stable outlooks and no defaults recorded so far.
Looking ahead, Fitch stated that market pricing and liquidity will depend largely on the scope and duration of the conflict. Over the longer term, outcomes will be influenced by post-war investor sentiment, economic activity, and market accessibility. Still, the region’s strong investor base and track record of recovery could help stabilize funding conditions once tensions ease.