The closure of the Strait of Hormuz has been the GCC’s biggest geopolitical shock in decades – but not a credit crisis.
After an initial spike in risk premiums, GCC bond markets recovered quickly as strong sovereign balance sheets, swift policy support and resilient local investor demand helped restore confidence. Our latest report reviews the market response, highlights the sectors and issuers best placed to navigate a new geopolitical landscape, and outlines our positioning for fixed income investors.
Unprecedented shock to the region’s risk profile: The closure of the Strait of Hormuz is one of the most significant geopolitical disruptions to hit the Gulf Cooperation Council (GCC) since the Gulf war. For investors, geopolitical risk has moved from regional to domestic. However, while trade flows, tourism, and sentiment have all suffered, it has not triggered a credit crisis: sovereign buffers, large sovereign wealth funds, and credible currency pegs have provided a solid backstop.
The response: GCC states are adapting fast. Saudi Arabia, the United Arab Emirates (UAE), and Oman are best positioned, leveraging on alternative export routes and accelerating infrastructure spending. Qatar and Kuwait retain vast financial buffers to weather prolonged disruptions. Bahrain remains the most vulnerable, with thin reserves and higher debt.
Market impact: GCC bond spreads spiked by around 50 bps in early March, but they have since retraced to near pre-conflict levels (ca. 97 bps for sovereigns, ca. 162 bps for corporates). Strong local investor demand (especially for sukuk – Islamic fixed-income-like securities) and swift policy support drove the recovery. Primary bond markets reopened again in April, with around USD 31 billion issued since the conflict began.
Higher event risk is now priced in: Despite plans to reduce dependence on it, the Strait of Hormuz will remain central to the region’s energy and trade, at least for the next couple of years. Investors are now assigning a higher probability of future disruptions. This does not necessarily imply a material deterioration in GCC credit quality, but it could affect how risk is priced; market access may become more selective during periods of renewed tensions, especially for weaker credit.
Outlook and positioning: Our base case assumes that the de-escalation holds, supporting a gradual spread normalisation. If the final US-Iran talks fail, we expect a sharper repricing: 75 bps+ for investment grade (IG) and 200 bps+ for high yield (HY). High-quality sovereigns, quasi-IG corporates, and large financials are acting as core carry holdings. State-backed developers look resilient, and some defensive high-yield names still offer room for spreads to tighten. We prefer to stay defensive on duration and be selective on short-dated, high-beta real estate bonds.
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The opinions expressed herein are correct as at 29 June 2026 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
