Text size:

  • Small
  • Normal
  • Large

Tough times loom large for investors in sukuk

Islamic bonds join the sell off on global fixed income markets as yields surge.

Investors in Islamic bonds are poised for a nerve-racking time when fixed-income markets reopen today, after UAE sukuk yields hit their highest level all year on Friday.

Average yields for Islamic bonds on the HSBC/Nasdaq Dubai UAE US dollar sukuk index rose 40.8 basis points and closed higher still at 4.48 per cent on Friday, the highest level since January last year. Funds tracking the index are now making losses, with total returns on the index down 1.4 per cent year-to-date.

Bond yields move in the opposite direction from prices and are heavily influenced by US treasury bond rates.

The sell-off of US treasuries, which pushed 10-year yields to 2.52 per cent on Friday, has "really spooked investors" and the possibility of a rise to 3 per cent was creating a "panic", said Gary Dugan, the chief investment officer for the Middle East and Asia at Coutts, the private bank.

"Investors knew they had too many bonds and sukuks but thought they had time to get out but the markets have moved too fast for them," he said.

"The GCC Islamic markets had been relatively unscathed up to that point because holders were in the main local GCC investors …There are some Islamic banks that we believe haven't liquidated yet so the selling pressure might persist."

Coutts had previously warned of signs of a bubble emerging in emerging market and Islamic debt.

Since Thursday, Islamic debt has performed little better than conventional bonds that had been faring worse during the recent bout of volatility.

Bond yields rose by 42.1 basis points to 4.28 per cent. Total returns of UAE conventional bonds tracked by the HSBC/Nasdaq Dubai index are nevertheless down 3.1 per cent this year.

The rout on fixed-income markets began last month when investors started to worry that the US Federal Reserve was planning to start to taper its US$85 billion a month purchases of bonds and mortgage securities, signalling an end to the crisis-era policy of quantitative easing.

The programme, which has swelled the size of the Fed's balance sheet to $3.3 trillion as it pumped liquidity into the US economy through bond purchases, averted a collapse of the global financial system in the short-term but has left significant concerns about the central bank's exit strategy.The latest speech on Wednesday night had done little to calm investor nerves, analysts from National Bank of Kuwait wrote in a research report.

"The chairman of the Fed, Ben Bernanke, tried to provide some comfort to the bond market but the hope lasted only seconds into his speech," the report said. "Investors took these signs as the Fed could be preparing for tapering in the second part of the year but Bernanke tried to limit the impact by suggesting tapering would not be over until mid-2014."

The end of quantitative easing is expected to have a disproportionate impact on riskier UAE fixed income, especially in Dubai, analysts from Bank of America Merrill Lynch wrote in a research report last week.

"Potential gradual normalisation of regional real rates should have a largely muted impact on Mena macro, though less favourable global liquidity conditions or EM risk appetite would mean greater scrutiny of credit risk in the Dubai Inc space," the report said.

Dubai World and Dubai Group have both recently conducted successful asset sales, with the completion of Dubai Group's long-running debt restructuring said to be "imminent", according to people close to the firm, after it sold a consumer finance unit to First Gulf Bank, Abu Dhabi's second-largest lender by market capitalisation.



Back to the top

More articles

Editor's Picks

 The Greens, villas: Q1 no change. 3BR - Dh210-250,000. 4BR - Dh210-260,000. 5BR - Dh220-300,000. Q1 2013-Q1 2014 5% rise. Pawan Singh / The National

In pictures: Where Dubai rents have risen and fallen, Q1 2014

Find out how rental prices in the prime locations in Dubai have altered during the first three months of the year and the current rates you will pay according to data provided by Asteco.

 Miele coffee maker making Cappuccino at Miele Gallery in Sama Tower in Dubai. The cost of this coffee maker is around Dh 17,000. Pawan Singh / The National

Space-age coffee comes at a price from Miele

Miele have taken the coffee machine to a new level with its Dh17,000 offering that is built into your kitchen.

 The bridge of Seajacks Hydra, as the wind farm installation vessel undergoes finishing touches and testing works at Lamprell’s Hamriyah facility in Sharjah before its planned delivery on June 2, 2014. Jeffrey E Biteng / The National

In pictures: Building the Seajacks Hydra

The Seajacks Hydra, a wind farm installation vessel, is undergoing finishing touches and testing works at Lamprell’s Hamriyah facility in Sharjah before its planned delivery on June 2, 2014.

 The Wind, Energy, Technology and Environment Exhibition takes place from April 14 to April 16. Above, the Dewa showroom during last year’s Wetex. Jaime Puebla / The National

April corporate and economic calendar for the UAE and overseas

From Cityscape to Wetex to stock-market holidays to nations reporting first-quarter GDP figures, here is our helpful calendar of April's business events in the UAE and internationally.

 The rush of new supply of hotel rooms pushed Dubai occupancy rates down to 87 per cent. Sarah Dea / The National

Dubai hotel room rates rise 10 per cent

The rush of new supply pushed occupancy rates down to 87 per cent, a dip of 2.6 per cent from the previous year. Winter months are the strongest for Dubai hotels, with occupancy and prices falling to half their peaks by July.

 Get the latest information on credit cards, bank accounts and loan products in the UAE. Mark Lennihan / AP Photo

Rates report: Latest on UAE loans, accounts and credit cards

Souqamal.com brings you the latest interest rates on banking products in the UAE.


To add your event to The National listings, click here

Get the most from The National