Relative Value in Sukuk

Interest rates in the US were left unchanged at the FOMC meeting in early May, however, rising trade tensions and weakening global economic data have decidedly turned the market dovish. Treasury yields moved substantially lower last month. Yields on 2yr, 5yr and 10yrs US treasuries closed the month of May at 1.92% (-38bps, m/m), 1.91% (-39bps, m/m) and 2.52% (-38bps, m/m) respectively.

The generous decline in benchmark yields facilitated strong performance by USD denominated bonds and sukuk. The total return on the Emirates NBD Markit iBoxx USD Sukuk index in May was a gain of 0.67% of which 0.35% came from capital gains and the remainder from coupon collection. Year-to-date the index has recorded total return of 5.66%

Two new securities, SDHMK 2022 and STCAB 2029 were added to the index last month while the INVCOR 2020 got excluded owing to it becoming less than one year to maturity.

Currently there are 109 issues totaling circa USD 104 billion in amount outstanding with the average rating remaining at A-. 

Based purely on trading yields on various sukuk as at the end of May, the following relative value observations are made:

1. In the sovereign sector :

• TURKSK 21s, rated BB, trading at yield of 6.65% appear cheaper than PKSTAN 21s that are rated two notches lower at B and trading at yield of 5.40%.
• DUGB 29s, unrated but with estimated credit quality in the high BBB rating category, trading at yield of 4.21% appear cheap compared with INDOIS 29s, rated BBB, at yield of 3.99%.

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