Are investment grade Sukuks decoupled from the conventional yield curve?

Abstract

We study the relationship between the US yield curve components and returns on investment grade Sukuks. The data cover the period from 07 September 2007 to 12 March 2021. The results show that the spillover between Sukuks and conventional fixed-income securities is time-varying that slightly rises during distress periods and reduces otherwise. Also, the long-term conventional yield curve components and the lower rated investment Sukuks contribute more to spillovers. On the other hand, the portfolio implications using investment grade Sukuks confirm diversification properties of the most sukuk categories and the safe-haven properties in lower rated investment sukuk during global financial crisis (GFC) and COVID-19 crisis. Our findings have implications for regulators and potential investors around the world