1. How is the evolving US interest-rate cycle shaping the outlook for GCC fixed-income markets, particularly in terms of sukuk yields and valuations?
At ARAM Capital we believe that the US rate cycle is at an interesting point for investors. Short-term rates will keep following the Fed’s action and what the market expects it to do. Long-term yields are a different story. Several structural forces are holding them up. The usual ones are the fiscal deficit, a geopolitical risk premium and Fed policy. Besides, few other structural factors like competition from highly rated AI and hyperscaler bond issuances, leveraged basis trades by hedge funds, Japan’s currency defense and a global growth resilience. These factors would remain in play for a while.
We also expect Treasury volatility, as measured by the MOVE Index, to stay high around current levels, as we see less communication from Fed and more Hedge Funds involvements with their leveraged basis trade.
In the regional market, Saudi credit is under some pressure, with CDS moving from 55 to 70 basis points since the end of August. We have taken a tactical overweight in Saudi credits across Sovereigns, GREs and Corporates. Qatar CDS has also risen, and we are looking to add exposure there.
2. What are the key factors driving investor demand for GCC sukuk, and how is appetite evolving among regional and international investors?
Middle East investors are under-allocated to fixed income, at around 14% of their portfolios against a global average of about 17%. With yields and credit spreads higher, our client meetings indicates that they want to raise their fixed income allocation to capture higher yields. We consider GCC credits as very strong. Spreads have widened, but far less than what we feared when the war started earlier this year.
Demand for Sukuks from both regional and international investors remains high and is still growing. That said, sukuk issuance has slowed in 2026 while conventional issuance has stayed strong.
3. How do you expect sukuk issuance across the GCC to develop over the coming year, and what trends are emerging in the primary market?
Sukuk usually trade tighter than conventional bonds, which works in the issuer’s favour. More issuers are coming to the market, and ESG funds are adding to demand. There is inherent demand from Islamic banks, insurers, endowments and pension funds.
The primary market for Sukuks has been trending strong. New issuance averaged around USD 80bn a year in 2024 and 2025, compared with about USD 50bn a year over 2021 to 2023.
2026 has been softer so far, with an annual run rate of around USD 60bn, because GCC issuers have used conventional offerings to reach a wider set of international investors.
We, at ARAM Capital stay positive on the Sukuk issuance outlook and expect annual GCC sukuk issuance to cross USD 100bn by 2030.
4. How do you assess the relative investment opportunities across sovereign, government-related and corporate sukuk in the GCC?
Saudi sovereigns and government-related entities (GREs) offer good relative value compared with their GCC peers. Corporate sukuk from Saudi banks and UAE real estate names also look attractive. We are overweight these segments in our flagship Horizons GCC Sukuk Fund and Model Portfolio.
5. How should investors position their fixed-income portfolios to balance yield opportunities, credit quality and interest-rate risks?
At ARAM Capital, our approach is to protect, preserve and grow capital. With so many risks around, we advise investors to keep duration at about 5 years and lock in today’s high yields. If yields rise further, the higher accruals should absorb the hit from duration.
We will not compromise on credit quality. We would not go below investment grade even for a high single-digit or low double-digit yield, as we believe the high-yield segment is the most exposed to the current crisis.
Fixed income should take a larger share of the asset allocation model now. A diversified portfolio of sovereigns, GREs and corporates with averaging portfolio ratings of A- to BBB+ is giving us a 6-7% yield. The recent widening in credit spreads has also helped us lock in those levels.
6. Looking ahead to 2027, what are the key opportunities and risks that could influence the performance of GCC sukuk and fixed-income markets?
Cash and fixed income are getting a fresh look at these levels, after falling out of favor following the pandemic. Middle East institutions and family offices have been investing globally, with a growing tilt towards alternatives such as private equity and private credit.
We expect rates to stay elevated. Short-term rates should ease a little from here while long-term rates hold firm, which points to a bull steepener. Long-term yields will stay high, and the short end will depend mostly on what the Fed does. We could see some spread tightening by mid-2027 if geopolitical risks fade.
This is why we see fixed income as the better risk-adjusted asset class today. A 5-year duration investment grade portfolio can deliver 6-7% with single-digit volatility, while global equities are expected to return 8-9% with volatility in the mid to high teens. We are advising clients at ARAM Capital to increase their fixed income allocation, and we think 2027 will be a good year to hold it.
On fundamentals, corporate balance sheets and cash flows of big companies remain strong even 8 months into the regional crisis. We do not see any major default risk or rating downgrades at this point.
The main risks are an escalation in geopolitical tensions and sticky inflation that forces the Fed to stay tighter than expected.
