Sukuk Outperform During Fed-Triggered Selloff
Dubai. Islamic bonds fared better than non-Shariah compliant notes in the emerging-market debt selloff last week after the Federal Reserve signaled it may trim bond buying, prompting the widest spread in 19 months.
The gap between JPMorgan Chase & Co.’s emerging-markets bond index and the average yield on sukuk tracked by HSBC/Nasdaq Dubai increased 31 basis points last week to 201 on June 21, the highest since November 2011.
Ten-year Treasury yields jumped to a 15-month peak on June 19 as Fed Chairman Ben S. Bernanke said risks to the US economy had eased.
Investors in debt that complies with Islam’s ban on interest, which is in demand in the oil-exporting Gulf Cooperation Council, have a limited number of alternatives to park their cash due to a scarcity in Shariah-compliant instruments.
Yields on sukuk climbed about half as much as those on emerging-market bonds last week.
“A lot of the sukuk is sitting in hold-to-maturity accounts,” Abdul Kadir Hussain, chief executive officer at Dubai-based Mashreq Capital DIFC Ltd., said by phone on Sunday.
This makes the notes less prone to “excessive market volatility” than bonds, which fund managers sell to meet stop-loss levels and satisfy redemption requests, he said.
The average yield on HSBC/Nasdaq Dubai’s US Dollar Sukuk Index gained 31 basis points, or 0.31 of a percentage point, last week to 3.89 percent on June 21.
In the same period, JPMorgan’s EMBI Global Diversified Blended Yield index surged 63 basis points, the most since 2008, to 5.9 percent.
Sukuk sales have increased as issuers seek to tap a market which may double in size to $3 trillion by 2015, according to Standard & Poor’s forecasts.
The amount of new debt available has, however, declined from last year’s record.
Islamic bond sales are down 8.8 percent so far in 2013 to $18.8 billion, according to data compiled by Bloomberg.
“There’s still important liquidity in the Islamic market that will sustain the sukuk better than bonds,” Montasser Khelifi, Dubai-based senior manager for global markets at Quantum Investment Bank Ltd., said by phone on Sunday.
“There are fewer alternative instruments than in the conventional space.”
More than $6.9 billion left funds investing in developing-nation debt in the four weeks to June 19, the most since 2011, according to Morgan Stanley, citing data from EPFR Global.
The exodus is reversing the $3.9 trillion of cash that flowed into emerging markets in the past four years.
Sukuk haven’t been immune to this month’s global selloff, with the yield on the HSBC/Nasdaq Dubai sukuk index gaining the most in more than three years last week as Bernanke indicated that policy makers may “moderate” their monthly bond purchases later this year and may end them in 2014 if economic growth is consistent with their forecasts.
Several developing-nation issuers are scaling back or canceling billions of dollars of bond sales as borrowing costs climb the most since 2008.
Majid Al Futtaim Holding LLC, the Dubai-based operator of Carrefour SA stores in the Middle East, delayed a bond sale earlier this month due to market weakness, two people familiar with the matter said June 3.
Bahrain’s government, which completed meetings with fixed-income investors last week, has yet to proceed with a sale.
“Sukuk are part of the same game,” Khelifi said. “They will be also be hit, they will just resist better than conventional given the liquidity in the Islamic space.”
The yield on Majid Al Futtaim’s 5.85 percent Islamic bonds maturing in 2017 increased 49 basis points this month to 3.57 percent at 2:11 p.m. in Dubai. That’s still below the 92 basis-point surge to 4.57 percent for the company’s non-Islamic 5.25 percent 2019 securities.
“The market is not convinced that the US economy is actually as strong as the Fed thinks it is and therefore the market was not expecting the tapering this soon,” Hussain at Mashreq Capital said.
During this period of uncertainty, the gap between bond and sukuk yield “will continue to widen and emerging markets will tend to underperform,” he said.