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        Weekly ETF Brief

        Safe havens reimagined: Saudi bonds surge as Treasurys falter

        Saudi Arabian bond returns have comfortably outpaced US Treasurys’ returns year-to-date. Saudi bonds remained stable during April’s market volatility, supported by positive ratings momentum. Yield premium over US Treasurys remains attractive. Spreads may tighten further if progress is made on index inclusion.

        4 min read
        Jason Simpson
        Senior Fixed Income ETF Strategist

        Once Federal Reserve (Fed) rates peaked in 2023, U.S. Treasurys were expected to become an attractive investment as rate cuts began. But with just 100 basis points (bps) of cuts since — and none this year — returns of around 4% in 2025 year-to-date1 have been unexceptional. The market is pricing around 120bps of cuts over the coming 12-months, so the Fed would need to undergo a dovish renaissance before investors could meaningfully benefit.

        Treasury investors also face concerns over the U.S. budget deficit. Bloomberg consensus forecasts this at around 6.5% of GDP for 2025, and little improvement out to 2027. This has compromised long-end performance - and undermined the usual duration trade.

        Grabbing yield

        Investors willing to take on additional credit risk have been rewarded. The J.P. Morgan EMBIG Diversified Index has returned 8.4% year-to-date,2 vindicating emerging market (EM) hard currency exposure. But around 50% of this exposure is rated non-investment grade, a fundamentally different risk profile to Treasurys. Higher-grade paper within the EM complex, such as Saudi Arabian bonds is an alternative. These are rated Aa3 by Moody’s, just two notches below U.S. government debt, and A+ by S&P and Fitch. Recent upgrades3 reflect strong budget dynamics. As we have noted previously, Saudi Arabia’s debt position is markedly more positive than many developed and EM peers. The IMF forecasts Saudi Arabia’s debt-to-GDP ratio will rise from 30% at the end of 2024 to 46% at the end of 2030 — well below the advanced economy projection of 113%.4

        The virtues of the higher quality rating shows in the relative stability of the exposure during the most recent bout of market volatility around tariffs. The maximum peak-to-trough drawdown in the J.P. Morgan Saudi Arabia Aggregate index, — a combination of hard and local currency exposures — was 2.5%, almost identical to the Bloomberg US Treasury index’s 2.4% fall, and well below the J.P. Morgan EMBIG Diversified Index’s 3.9% decline.5

        There remains a meaningful yield premium to harvest. A switch out of the current on-the-run 10Y Treasury into a USD-denominated Saudi Arabian bond offers a yield pick-up of 60bps, rising to 90bps6 for local currency bonds, This yield spread has been a driver in the J.P. Morgan Saudi Arabia Aggregate Index’s year-to-date return of 200bps over the Bloomberg US Treasury Index.

        Index inclusion upside?

        Spread tightening to Treasurys has driven the remainder of the outperformance. Most credit spreads now look historically tight, but index inclusion potential supports possible continued Saudi Arabia bond outperformance.

        In late September to early October J.P. Morgan will decide which countries to include in its local currency emerging market indices. We believe that market access improvements and enhanced liquidity will lead to the inclusion of Saudi Arabia bonds.

        If included, Saudi Arabia bonds should account for approximately 3% of the index. Phased entry would likely begin in mid-2026, with a gradual phasing-in of around 1% per month. As liquidity improves, Saudi’s share could grow.  

        Overseas investor flows into both Chinese and Indian bonds were strong ahead of their index inclusions. Saudi Arabia will not constitute as large a part of the index as either of those countries, but local currency Saudi Arabia bonds are less widely held. Inclusion could spark a rush by EM fixed income asset managers.

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