Fitch Ratings-Dubai/Jakarta/Toronto: GCC fixed-income yields are benefitting from a decline in geopolitical risk premiums following the US-Iran deal, Fitch Ratings says. This is reflected in yield spreads between GCC investment-grade debt and US Treasury bonds having returned to pre-war levels. Spreads on speculative-grade GCC sukuk remain higher, reflecting a wider risk premium.
In absolute terms, GCC fixed-income yields fell from their March peaks but remain high, reflecting US Treasury rate volatilities to which GCC markets are closely correlated due to US dollar currency pegs. GCC sukuk continue to have lower yields than GCC bonds, on average, due to broader demand from Islamic banks.
The spread between GCC yields and US Treasuries indicates that geopolitical risk premiums have eased. The yield to maturity (YTM) spread between the S&P GCC Sukuk Index and the S&P U.S. Treasury Bond Index narrowed to 67bp as of 15 June, broadly back to its pre-conflict level (70bp on 27 February), and down from about 100bp on 23 March. GCC sukuk spread normalisation was less pronounced than for GCC bonds, where the spread versus US Treasuries narrowed to 89bp as of 15 June, from about 100bp on 27 February and 126bp on 23 March.
By contrast, spreads on high-yield GCC sukuk remain heightened. The YTM spread on the S&P GCC High Yield Sukuk Index versus US Treasuries was 251bp on 15 June, down from 390bp on 23 March but still above its pre-conflict level of 209bp.
The future yield trajectory of GCC fixed income remains uncertain. The reported US-Iran deal, if signed and implemented, would reduce the more acute geopolitical, credit and market risks linked to the conflict. However, the agreement may still be delayed, not implemented, or followed by renewed instability. Fitch no longer expects any Federal Reserve rate cuts in 2026.
The YTM on the S&P GCC Sukuk Index fell to 4.94% on 15 June, down by 18bp from its peak on 23 March but still 51bp above its pre-conflict level. The S&P GCC Bond Index yielded more at 5.16%, 22bp below its March peak but still 43bp above its pre-conflict level. Both indices comprise investment-grade instruments. Yields remained significantly higher on the S&P GCC High Yield Sukuk Index, at 6.78% as of 15 June. This declined substantially by 124bp from 23 March, although it was still 96bp above its pre-conflict level.
Volatility in US Treasury rates reflects broader inflation concerns. The S&P U.S. Treasury Bond Index yielded 4.27% on 15 June, about 15bp lower than at end-March but still 54bp higher than at end-February. The S&P GCC Bond & Sukuk Index remains highly correlated with the U.S. Treasury Bond Index, with correlation above 0.89 (out of 1).
Over 84% of Fitch-rated GCC sukuk were investment grade at end-1Q26. GCC sukuk and bond yields had very high correlation (0.98 out of 1) over the past year, indicating that investors generally perceive the credit risk of sukuk similarly to that of bonds. Most Fitch-rated sukuk are senior unsecured obligations of the issuer and rank pari passu with other senior unsecured obligations, including bonds. However, sukuk generally have more complex structures than bonds.
Fitch’s credit ratings do not directly address any risk other than credit-related risks. Ratings do not deal with the risk of a market-value loss on a rated security due to changes in interest rates, liquidity or other market considerations. However, healthy trading activity, liquidity, and diverse investor participation can help to improve financing conditions for issuers and may support credit quality when underpinned by strong fundamentals.
