Mena bonds drop as Fed tipped to change tack on rate cuts

• US rate cut expected on Wednesday
• But heavier cuts in 2026 less likely
• Mena bonds had surged since April

Mena sovereign bond prices have fallen again this week as the likelihood of hefty cuts to US interest rates recedes.

The US Federal Reserve is tipped to reduce its benchmark rate on Wednesday, but the swingeing cuts that had been forecast for next year are considered less likely.

“The outlook for monetary policy in 2026 is harder to discern,” Goldman Sachs wrote in a December note.

Mena bond prices had surged from mid-April on expectations of deep cuts: as interest rates fall, the value of bonds issued at higher interest rates should rise.

Since hitting a three-year high in late October, the price of a 10-year UAE government bond has fallen 1.4 percent. A 30-year Saudi government bond is down 2.9 percent since reaching a one-year peak the same month.

Yields and bond prices are inversely correlated, so declining prices raise yields and indicate waning demand.

If the Federal Open Market Committee (FOMC) does reduce its rate by 0.25 percentage points to 3.5-3.75 percent on Wednesday, it will be the third cut since mid-September and a three-year low.

Stubborn US inflation has tempered expectations for further rate cuts in 2026. This has led the yield on 10-year US treasuries to surge to a three-month high.

“Inflation has proved to be sticky … which explains why the hawks on the FOMC are reluctant to approve further policy easing,” investment bank ING wrote in a December note.

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ING forecasts US rates will fall to 3.25 percent next year, which would be far below last year’s two-decade high but elevated compared with the ultra-low rates of 2008 to 2022.

Mena bonds, like most fixed-income products, are benchmarked against US borrowing costs, commonly 10-year treasuries, so US interest rate changes are hugely important to bond pricing – not only for upcoming issuance but those already owned by investors.

Sovereign bond prices for various Mena countries have declined from their 2025 highs. Ten-year Moroccan and Jordanian debt are down 1.8 and 1.3 percent from peaks achieved in September and October respectively.

Nevertheless, Mena sovereign bond prices are still up overall this year. Egyptian debt has surged nearly 22 percent, while the Jordanian bond is up almost 10 percent.