Bahrain's 2028 dollar bond is now yielding 8.99% - its highest in six years - after jumping about 160 basis points since late August, when the US Treasury selloff kicked off. Over the same stretch, its dollar bonds fell 4.2% and its sukuk slid 3.5%. The steepest increases are at the short end, a sign investors see the immediate period as the stress point.
A Bloomberg gauge shows Bahrain's risk premium over Treasuries sits well above pre-war levels. Pressure is concentrated at the front, with the 2028 spread widening more than notes due in 2035.
The Iran war is hitting Bahrain's economy on multiple fronts, disrupting exports, cutting crude output and damaging infrastructure. A Bloomberg News survey's median forecast points to a 6.6% economic contraction this year.
Even before the conflict, Bahrain was among the more fiscally fragile emerging borrowers. According to World Bank figures, the budget shortfall amounts to 10.5% of GDP, public debt exceeds 140% of GDP, and it is the only Gulf Cooperation Council country rated junk by all three major agencies.
Bond spreads are the market's running judgment on a country's finances. Market Briefs covers sovereign credit free every morning.
The slide is reviving memories of the post 2014 oil-price crunch that led to a 2018 bailout pledge of more than $10 billion from Saudi Arabia, the UAE and Kuwait. Investors say GCC capitals are likely watching the latest strains closely.
"The selloff in Bahrain eurobonds is issuer-specific and extends beyond a general weakness in EM high-yield credits," said Fady Gendy of Arqaam Capital, where he manages fixed-income portfolios in Dubai. "We would expect Gulf Cooperation Council support to become more explicit and broad-based on any large and sustained market weakness."
"For both the UAE and Saudi Arabia, Bahrain's security and geopolitical stability is viewed as an extension of their own," said Mahdi Ghuloom, a fellow at Observer Research Foundation Middle East. "An economically dire situation will only increase the risk of instability in Bahrain, which could have ramifications for its neighbours."
Investors say Bahrain can still tap bond markets, citing a $1 billion sale in June that went ahead only hours after missiles targeted it. The hitch is the cost. With Treasury yields near 5% and investors requiring roughly an additional 3.5 percentage points to own Bahrain debt, new borrowing would be prohibitively pricey. Bahrain's yields now top Egypt's even though Moody's rates Bahrain two notches higher, and its credit default swaps are pricier too.
Before the 2018 rescue, IMF data show hard-currency reserves were enough for only 1.5 months of non-oil import needs. In January, the fund estimated reserves covered a little over two months of non-hydrocarbon imports. If yields climb further, a Gulf backstop may become increasingly urgent.
For now, Gendy expects Bahrain to muddle through with private placements, domestic funding and sukuk to meet obligations. He sees the shortest maturities as potentially interesting once the US bond selloff cools. "This is attractive carry to earn without taking extensive duration risk," he said.
In Bahrain, the largest run-up has been in near-term borrowing expenses. Surging US Treasury yields and war fallout are lifting Bahrain's borrowing costs.
Crisis-era levels mean investors see crisis-era risk. Get the free Market Briefs daily newsletter and follow it.
