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Published Date: 14 August 2018
Rising inflation in the US, large supply of new US treasuries and the Federal Reserve’s rate hike in June – all combined to push US treasuries down last month. UST yield curve rose across all tenures with yields on 2yr, 5yr and 10yr USTs closing the month of July at 2.67% (+14bps m/m), 2.85% (+11bps m/m) and 2.96% (+10bps, m/m) respectively.
Under pressure from the falling benchmark yields, USD denominated bonds and sukuk portfolios struggled to maintain prices, however, coupon collection kept the total returns in positive territories. Emirates NBD Markit iBoxx USD Sukuk index closed marginally up at 117.01, representing circa 0.8% gain during the month of July though year-to-July total return was still a loss of -0.96%.
Excluding the coupon collection, the return based purely on capital prices on the Emirates NBD iBoxx sukuk index fell by 3.2% in the seven months ending July 31, mainly reflecting the impact of rising UST yields. Looking ahead, we expect coupon collection to outweigh the capital prices fall and therefore the total return for the full 2018 year is likely to improve from here.
Looking at the trading yields on various sukuk at the end of the month of July, following relative value observations are made:
In the sovereign sector :
Source: Bloomberg, Emirates NBD Research
Relative value in global sukuk
March FOMC in focus
Stronger than expected GDP growth in the US
Performance of GCC bonds and sukuk in 2018