Sukuk yields approach pre-war levels
Fitch Ratings stated that liquidity levels for most bonds, which it rates, have returned to levels close to those recorded before the war, despite ongoing geopolitical tensions, signaling a gradual market recovery that remains uneven across countries, sectors, currencies, and credit rating categories. The agency noted that bond liquidity has not yet fully returned to pre-war levels seen in January last year, but the average liquidity in August reached its highest point since the conflict began, reflecting a notable improvement compared to the depressed levels observed in March.
Despite this improvement, Fitch expects liquidity to remain constrained as long as geopolitical tensions persist, noting that the pace of recovery varies by credit rating, country, sector, currency, and the degree of sensitivity of each issuance to geopolitical risks. Data showed that investment-grade bonds clearly enjoyed higher liquidity levels than non-investment-grade bonds, reflecting investors’ preference for higher-quality credit assets amid continued uncertainty.
Fitch revealed that slightly more than 75% of rated bonds recorded a liquidity score above 50 points on August 4, compared to about 64% on March 23, though this remained slightly below the 81% recorded in January. The average liquidity score for Fitch-rated bonds, excluding local ratings, stood at around 64 points on August 4, up from the low of 55 points recorded on March 23, but still below the pre-war level of 68 points. These figures reflect a significant narrowing of the liquidity gap that emerged since the start of the conflict, as the market has regained a substantial portion of its capacity to absorb trading, though it has not yet reached January levels.
Investment-grade bonds rated by Fitch recorded an average liquidity of 69 points on August 4, compared to 64 points in March and 72 points in January.
At the market level, bonds rated by Fitch and issued from Hong Kong, Malaysia, Indonesia, Egypt, as well as supranational institutions, recorded the highest liquidity scores. Bonds issued from Egypt, Oman, Malaysia, and Ireland managed to surpass pre-war liquidity levels in August, a development that highlights significant differences in the speed of recovery among markets. Egypt stood out particularly, as the liquidity score of its bonds rose to a level approximately 11 points above pre-war levels, marking one of the strongest recoveries among the markets analyzed by the agency.
In Gulf markets, data showed disparities in liquidity levels within the dollar-denominated outstanding issuance market as of August 12. Both dollar-denominated bonds and sukuk recorded an average liquidity score of around 50 points, indicating similar performance within the dollar market. However, when considering all currencies, sukuk outperformed bonds, with an average liquidity score of 57 points for sukuk versus 53 points for bonds. The gap widened further when excluding dollar-denominated issuances, as the average liquidity of sukuk rose to 68 points, compared to just 57 points for bonds, demonstrating stronger sukuk performance in other markets and currencies.
On a all-currency basis, sukuk outperformed bonds in liquidity in Oman, Bahrain, and Saudi Arabia, while bonds and sukuk recorded identical liquidity scores in both Qatar and the UAE. In Kuwait, bonds were more liquid than sukuk.
