Sukuk and bond pricing mostly similar; Sukuk less liquid

Sukuk and bond pricing mostly similar; Sukuk less liquid

Fitch Ratings-Dubai: The pricing of most comparable sukuk and bonds continued to be highly correlated in 2022 despite market volatilities such as rising rates and geopolitical challenges, Fitch Ratings says. However, there were cases of bond prices falling more than comparable sukuk. This stems from sukuk being less liquid than bonds in general, owing to the buy-and-hold nature of most sukuk investors, which are mainly Islamic banks. We expect this trend to continue in 2023. However, the liquidity profile of most Islamic banks in the GCC generally remain intact.

Fitch analysed the pricing of 40 comparable sukuk and bonds issued by the same obligors from the GCC, Malaysia, Indonesia and Turkiye. During normal market conditions, their yield-to-maturity are strongly correlated. For instance, between 2018 and 2022, comparable sukuk and bonds had a pricing correlation of 0.9 on average.

On the back of rising rates in 2022, a sukuk index analysed by Fitch declined by 6.4% over the year. However, it outperformed a broad Emerging Markets Bond Index, which fell by 15.7%. The sukuk outperformance is also supported by the higher weight of oil exporters in the sukuk index.

A sizeable number of sukuk were issued in January and February 2023, including that by