Middle East sovereign CDS reacting to Iran War with composure
Fixed income markets have long been lauded for their capacity to remain circumspect during volatility that has roiled other asset classes. So far, March 2026 has demonstrated that this reputation is well earned.
As investors digested the news of military action in Iran over the weekend of February 28-29, energy markets reacted in predictable fashion: ICE Brent Crude Futures leapt from under $73 on February 27 to briefly exceed $119 on March 9. The contracts were trading above $103 as of March 17.
The volatility saw many major equity benchmarks cement year-to-date losses, with sharper pullbacks in markets more exposed to a prolonged closure of the Strait of Hormuz like Korea, where the Kospi saw an 18% fall in just two trading sessions between March 3 and 4.
Reactions were more measured in government bonds, with 10-year U.S. Treasury yields climbing 32 basis points between February 27 and March 13, although 10-year U.K. Gilt yields leapt more than 52bps over the same period. Looking beyond bond yields, credit default swaps can often provide a valuable alternative aperture into investor confidence - and CDS are an especially useful barometer of sovereign credit sentiment in the Middle East, a region where pegged currencies and less liquid equity and bond markets provide fewer insights into credit conditions within nations.
To see how credit derivatives markets are pricing the unfolding situation in the Middle East, ICE Clear Credit examined CDS spreads from the start of 2025 for seven sovereign bond issuers subject to Iranian drone or missile attacks since February 28: Abu Dhabi; Bahrain; Dubai; Israel; Oman; Qatar; and Saudi Arabia.1
Figure 1. Credit default swap spreads for seven Middle East sovereign bond issuers, January 2025 - March 16, 2026. Source: ICE Clear Credit. Note: data sourced from executable and indicative quotes in the market.
The analysis unearthed several compelling observations across the CDS spreads for the issuers examined:
Issuers that accommodate U.S. military bases, operate service economies and are minor oil producers are seeing the largest blowouts in credit spreads. Bahrain and Qatar house key U.S. Air Force and Navy installations and have both come under attack from Iran in the past two weeks. Qatar CDS spreads soared 60% between February 16 and March 16, with Bahrain spreads jumping almost 46%. The only issuers to see comparable spread widening were Dubai (54%) and Abu Dhabi (50%), both economies that are in large part service-oriented, rely heavily on western tourism and expats, and locations that also house a significant U.S. military presence.
It’s also notable that in a region awash in oil wealth both Bahrain and Qatar are peripheral producers relative to their neighbors. Abu Dhabi is a meaningful producer (~4 million barrels a day) but still producing just a third of the output of Saudi Arabia (~11 million barrels per day) which has only seen its credit spreads move by 13% since February 16. It appears that CDS markets are taking issuer oil reserves and production into account when gauging potential for credit deterioration in a prolonged war.
March 2026 is a smaller credit event for Israel than June 2025. Credit spreads for many Middle Eastern nations reacted more severely to the Twelve-Day War between Israel and Iran in mid-June 2025 than they have so far to the current military action. Israel saw markedly sharper moves in CDS spreads during the nation’s strikes against Iran’s nuclear program nine months ago (spreads leapt more than 27% between June 11 and 13) than they have so far (up 15% between February 16 and March 16).
This suggest that credit markets are treating Israel as a lower-risk issuer since the Twelve-Day War and that the diminution of Iran’s military capabilities during that event and the current intervention is making Israel an improving long-term credit in the eyes of investors, despite the heightened geopolitical tensions.
Global trade shocks have had a much bigger impact on fears of credit deterioration than regional war. The spike in CDS spreads on the left side of Figure 1 make this point overwhelmingly clear, with six out of seven issuers seeing greater spread volatility during the market turbulence surrounding the imposition of new U.S. trade tariffs in early April 2025 (Bahrain being the exception, likely due to favorable preexisting trade agreements with the United States).
Perhaps the most notable takeaway here is the relative composure with which the market has reacted: CDS spreads appear to be taking the most serious military intervention in the Middle East in years remarkably in stride. This is despite the war crowding out virtually every other macro theme that has dominated market discussion so far in 2026: AI bubble fears, concerns AI will decimate software as a service asset valuations, anxiety over a rash of private credit markdowns, to name but a few.
Whether credit markets will be able to maintain this level of sangfroid if the conflict escalates, however, remains to be seen.
1. Due to limited liquidity in CDS on the United Arab Emirates (UAE) itself, we focused on the more liquid market for credit protection on the two biggest emirates: Abu Dhabi and Dubai.
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