Relative Value in Sukuk : May 2018

The US Federal Reserve left benchmark interest rates unchanged last month, though futures implied probability of a rate hike in June is almost 100%. Boosted by solid economic data releases, UST yield curve shifted upwards last month with some steepening in the shorter end of the curve. Yields on 2yr, 5yr, 10yr and 30yr treasuries closed the month of April at 2.49% (+22bps m/m), 2.80% (+24bps m/m), 2.95% (+21bps m/m) and 3.12% (+15bps m/m) respectively.

Rising benchmark yields caused substantial losses for sukuk portfolios globally.  Total return on Markit iBoxx Emirates NBD USD Sukuk index for the month of April was a loss of -0.64%. Excluding the benefit of coupon collection, the return on index would have been a loss of -0.99%. That said, this compares favourably with total loss of -1.02% on emerging market USD denominated bonds index during the same period.

Looking at current yields, following relative value observations are made:

In the sovereign sector :

1. B rated PKSTAN 22s at yield of 6.64% appear cheap compared with PKSTAN 21s at yield of 6.14% for same risk albeit with one year longer tenure.
2. KSA 22s, rated A, appear cheap at yield of 3.94% compared with INDOIS 22s, rated BBB, at yield of 4.0%.

Sovereign Sukuk Universe

Source: Markit, Emirates NBD Research

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