- Israeli sovereign bonds and credit default swaps (CDS) have seen significant widening, while the Israeli shekel has also sold off prompting intervention from the Bank of Israel1.
- The yield on the Saudi Arabian 10-year government bond has risen to 5.93%, an increase of 6.6% since the start of October2.
The conflict between Israel and Hamas is putting pressure on borrowing costs in countries around the Middle East, as investors fret that the volatile situation could escalate.
The spreads between the average yields of dollar-denominated bonds issued by Jordan, Egypt and Israel and equivalent US Treasuries have risen sharply this week as additional risk to owning the debt is priced in.
Figure 1: Jordanian, Egyptian and Israeli spreads
US President Joe Biden visited the region this week after Israel’s military warned more than one million Palestinians to leave northern Gaza as it prepares for a ground offensive that the UN fears could cause massive civilian displacement.
“The events in the Middle East over the past week have led to a modest increase in emerging market risk premia, as investors wait for further developments and digest the headlines,” says Mohammed Elmi, Senior Portfolio Manager for Emerging Market Debt at Federated Hermes.
“Israeli sovereign bonds and credit default swaps (CDS) – which are not formally part of the main emerging market bond or CDS indices – have seen significant widening, while the Israeli shekel has also sold off, prompting intervention from the Bank of Israel.
“Neighbouring Jordan and Egypt have also underperformed. Both countries have challenging sovereign credit profiles and any spillover will be acutely felt,” Elmi says.
The economies of Egypt and Jordan are both heavily reliant on tourism. Egypt received a US$3bn rescue package from the International Monetary Fund last year.
The yield on the Israel 10-year government bond stood at 4.37% at 16:30 GMT on Thursday, while the yield on the Saudi Arabian 10-year government bond had risen to 5.93%, a rise of 6.6% since the start of October3.
Figure 2: GCC spreads
Elmi adds: “So far, the high-grade oil producing Gulf Cooperation Council (GCC) region – comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates – has been immune with escalation with Iran the main risk. Even though most GCC oil exporters have begun to de-risk oil export passage away from the Straits of Hormuz, any escalation with Iran would see interruptions in oil exports and a substantial spike in prices.”
Muted stock markets
European markets closed lower Thursday as investors weighed up the impact of the crisis in the Middle East on top of earnings reports as well as macroeconomic concerns. The pan-European Stoxx 50 ended 0.38% lower (down 2.57% over previous five days) and the FTSE 100 was down 1.17%. The Swiss Market Index has fallen 4.84% over previous five days4.
Geir Lode, Head of Global Equities at Federated Hermes Limited, struck a note of optimism. “As interest rates approach their peak, a 12% expected earnings growth next year will pave the way for the next bull market,” he says.
“The Fed’s policy and language has been effective in preventing a recession and containing inflation, creating the opportunity to lower interest rates. In this environment, we see early cyclical stocks as attractive. However, if strong employment and consumer behaviour persists we expect inflation and interest rates to stay higher for longer.”
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1 Bloomberg as at 19 October.
2 Ibid.
3 Ibid.
4 Ibid.
