Saudi Arabia’s fixed income shelter from the Middle East storm
The pre-conflict case for Saudi Arabia bond exposure has strengthened due to higher oil prices bolstering the Kingdom’s fiscal position, higher returns versus Treasurys, and a conflict-driven yield premium. Flagship emerging-market index inclusions are also supportive.
The argument for Saudi bonds as a higher-yielding US-dollar-denominated strategy, given the Saudi riyal’s USD peg, has strengthened in recent weeks. We think sustained elevated oil prices, caused by a sustained conflict, or supply issues after a conflict, could further support Saudi Arabia’s improved budget numbers. The bond shock that followed the conflict is unwinding, but Saudi spreads have not re-tightened to the same degree as other emerging market (EM) bonds, hinting at an uncertainty premium, although this may evaporate if the conflict is resolved. Overseas buyers will likely engage with the local currency market ahead of index inclusion in flagship Bloomberg and J.P. Morgan EM indices.
Uncertainty around the conflict end persists but market data implies an expectation that the worst has passed, and that the next stage will be negotiations. The clean-up will require infrastructure repair and will likely increase military spending, which could weigh on regional growth. The IMF has cut Saudi Arabia’s 2026 growth forecasts by 140 basis points (bps) to 3.1%.1
But Saudi budget balance projections look rosier because of the higher oil price. A combination of economic diversification and spending on Vision 2030 has reduced the Saudi budget deficit sensitivity to oil—but correlation remains high.2
Figure 1: Higher oil prices improve Saudi Arabia’s budget balance
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The end of the Strait of Hormuz blockades is not a given, but Saudi Arabia’s East-West pipeline can deliver around seven million barrels per day to the Red Sea. Prices are not falling as fast as they rose. Nonetheless, the IMF expects Saudi Arabia’s public sector finances to be slightly weaker than it previously thought. On average, it has reduced its forecast for the government’s fiscal balance by 0.2 percentage points of Gross Domestic Product (GDP) each year over the next five years. But Saudi Arabia’s overall position is strong: the IMF Fiscal Monitor suggests the debt-to-GDP ratio will not breach the 40% level until 2030.3
This combination of slower economic growth and budget repair could be positive for Saudi Arabian bonds.
Saudi bonds’ conflict resilience
Saudi bonds did not escape the conflict’s impact on bond markets despite its positive budgetary backdrop. The conflict’s inflationary implications led to a repricing of central bank expectations, with expected rises in place of priced-in cuts. Fewer cuts, higher inflation, and implications of weaker growth have driven bond yields upwards.
But the Kingdom of Saudi Arabia’s (KSA) bond market has shown notable resilience throughout the conflict. Figure 2 shows Saudi bonds tracked US Treasurys quite tightly over the first two months of the year and peaked at the end of February. Saudi bond prices fell in early March as the conflict began, but the maximum peak-to-trough drawdown of the J.P. Morgan Saudi Arabia Aggregate Index was 2.77% from 27 February 2026 to 23 March 2026. The Bloomberg US Treasury Index’s 2.36% fall from peak to trough occurred over a slightly longer period, between 27 February and 26 March. The J.P. Morgan index4 has longer duration, implying slightly bigger price moves should be anticipated. Saudi bonds have outperformed US Treasurys since a late March rebound.
Saudi’s yield and long-run returns premiums
We think the relatively generous current yield5 could support returns. The benchmark 10-Year Saudi-Riyal (SAR)-denominated bond has a yield pick-up to US Treasurys of over 100 basis points (bps)—and 240bps greater than German Bunds.6
Hard currency Saudi Arabian bonds offer greater yields than other similarly rated emerging market (EM) countries, including some other GCC issuers. For example, Saudi Arabia is rated Aa3/A+/A+ from Moody’s, S&P and Fitch. This is just 1-2 notches below Aa2/AA/AA for Qatar and Aa2/AA/AA- for the UAE. The yield of the 10-Year USD denominated Saudi bond is 5.08%, versus 4.48% for Qatar and 4.90% for UAE bonds.7
Moreover, spreads over Treasurys have not reverted to tight levels as quickly as other EM issuers, potentially signalling some discount as the conflict persists. Figure 3 shows spreads for the high-grade and high yield components of the J.P. Morgan EMBIG Index. The spread for the high-grade component of the index is just 2bps above its 2025 lows, while the high yield component is back at its tightest levels. In contrast, Saudi Arabian hard currency spreads remain close to 20bps off their tightest 2025 spreads.
A relatively higher starting yield, coupled with scope for spread tightening could help returns in the long run. The J.P. Morgan Saudi Arabia Aggregate Index has a blend of hard currency (70%) and local SAR-denominated debt (30%). The Saudi index’s returns have been stronger over the last two years but the Bloomberg Global-Aggregate USD hedged Index, the appropriate comparator given SAR’s USD peg, has seen better returns over five- and three-year horizons (Figure 4).
Figure 4: Index strategy returns and volatility
Annualised return (%) | |||
J.P. Morgan Saudi Arabia Aggregate Index | Bloomberg Global-Aggregate Total Return Index USD Hdg | Bloomberg US Treasury Index | |
Last 12 months | 4.80% | 2.79% | 2.53% |
Last 2 years | 6.50% | 5.05% | 5.07% |
Last 3 years | 3.46% | 4.00% | 2.38% |
Last 5 years | 0.41% | 0.82% | -0.30% |
| Annualised volatility (%) | ||
Last 12 months | 3.78% | 2.81% | 3.51% |
Last 2 years | 4.58% | 3.07% | 4.12% |
Last 3 years | 6.35% | 4.05% | 5.07% |
Last 5 years | 7.75% | 4.90% | 5.62% |
Source: State Street Investment Management, Bloomberg Finance, L.P., as at 30 April 2026. The performance data quoted represents past performance. Past performance does not guarantee future results. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
For the three years before the conflict, the volatility of the Saudi index had been falling steadily, in common with many other comparable fixed income indexes. Figure 5 shows the 12-month rolling volatility of several bond index strategies. The J.P. Morgan Saudi Arabia Index is more volatile than the USD-hedged version of the Bloomberg Global-Aggregate Index. But the volatility of the J.P. Morgan Saudi Arabia Aggregate Index has converged to levels similar to the US Treasury Index.
Turn to the index?
Index inclusion is a further tailwind. Saudi Arabia’s bond market’s growing size and relevance within EM has led to greater involvement by overseas investors. Regularly scheduled large and liquid bond issues in the primary market, and liquidity improvements in the secondary market have helped, as have improvements to market infrastructure. As a result, both J.P. Morgan and Bloomberg have decided to include local currency Saudi bonds in their indices.
- J.P. Morgan’s GBI-EM benchmark series of indices will include Kingdom of Saudi local currency bonds from January 2027. The country cap will be also lowered to 9%, which pushes a higher allocation to smaller countries. KSA bonds will account for 2.52% of the AUM of the most popular index in the series, the GBI-EM Global Diversified Index.
- Bloomberg EM indices will include local currency Kingdom of Saudi Arabia bonds from April 2027. Bloomberg estimates Saudi bonds will comprise 2% of the Bloomberg EM Local Government Bond Index and 4% of the Bloomberg EM Local Currency Gov 10% Country Capped Index.
This could contribute materially to demand for SAR-denominated bonds. The AUM tracking the J.P. Morgan’s GBI-EM Global Diversified Index surpasses $300bn USD8 which we calculate could equate to more than $7.5bn USD of additional demand in the above inclusions and current valuations.9 Overseas participation has increased in Saudi local currency bond markets, but the segment remains under-owned by ex-Saudi investors. Historically, index inclusion has been a catalyst towards broadening ownership of newly included countries’ bonds.
The case for bond exposure is supported by Saudi Arabia’s low debt/GDP ratio. Higher oil prices can support the budget position. The bonds provide a meaningful yield uplift relative to US Treasurys. And the emerging marketindices announcements reinforce an integration with global markets.
The conflict has resulted in Saudi bonds trading at a discount versus other EM bonds, with spreads remaining above their tightest levels. This may not persist if the Strait of Hormuz reverts to normality—but the case for Saudi exposure is supported by more than a reduction of hostilities.
Learn more about Saudi exposures.