It is simplistic to look at Gulf sovereign this week and make the argument that they cannot escape their geography. But in the financial markets that is exactly what they have done.
In a week of war, it has been striking how little Gulf sovereign bond spreads have widened. It is a reflection of how the investor base for this region has changed in recent years and how the issuers have transitioned from being thought of as emerging market risk.
Bonds from issuers like Saudi Arabia, Abu Dhabi and Bahrain were around 10bp-15bp wider on the week. The United Arab Emirates has been a touch wider, selling off 15bp-20bp.
But these numbers stabilised early in the week in any case, the degree of widening was nothing like what emerging market investors are used to experiencing in a bout of volatility.
Abu Dhabi’s recent 10 year for example popped 15bp wider, but that only brought it to 40bp over US Treasuries versus its 25bp reoffer spread last week.
At least some of the reason for this that in the last few years, Gulf sovereigns have attracted new investors.
EM funds are little present in the bonds anymore, uninterested in the paltry yields. They have been replaced by global investment funds and investment grade crossover money. Much cash has been driven there by political and strategic alignment between countries — China rotating out of US Treasuries and into other assets, for example.
That money, based on this week's performance, seems like it will stick around.
Some of the stickiness may of course be down to a lack of alternatives. One banker this week asked rhetorically what China would otherwise do if it wanted to sell out of Gulf debt under threat of war.
It is hardly likely to reverse back into Treasuries when the issuing country had just waged a war that bumped the oil price, pouring money into the coffers of those Gulf sovereigns.
The uncertainty that has engulfed the Middle East this week is something EM investors will be very familiar with. The way the bonds have traded, not so much.