Sukuk liquidity outpaces Gulf bonds as markets recover

Sukuk have become more liquid than conventional bonds across key Gulf markets, with Saudi Arabia, Oman and Bahrain recording stronger trading conditions for Islamic debt as regional fixed-income markets recover from disruption caused by the US-Iran conflict.

Liquidity scores for sukuk rose to 68 compared with 57 for bonds when US dollar outstanding securities were excluded, widening the gap between the two asset classes. The figures indicate that investors are finding it comparatively easier and less costly to trade sukuk across several domestic Gulf markets.

The pattern was not uniform across the Gulf Cooperation Council. Sukuk and conventional bonds recorded identical liquidity scores in Qatar and the UAE, while bonds remained more liquid than sukuk in Kuwait. The differences highlight the fragmented nature of the recovery as trading conditions depend on market depth, currency, issuer profiles and the availability of securities to investors.

Across outstanding GCC US dollar debt markets, the distinction was narrower. Dollar-denominated sukuk and bonds both carried average liquidity scores of around 50 as of August 12. When securities across all currencies were considered, however, sukuk recorded an average score of 57 compared with 53 for conventional bonds.

Liquidity is measured using Bloomberg’s Liquidity Assessment framework, which estimates the cost of liquidating securities. A score of 100 represents securities carrying the lowest estimated liquidation costs within their asset class, while a score of one represents those with the highest costs. The assessment excludes sukuk carrying only local ratings and securities without an available liquidity score.

The improvement extends beyond the Gulf. Sukuk issued from Egypt, Oman, Malaysia and Ireland exceeded their pre-war liquidity readings during August. Egypt recorded one of the strongest rebounds, with its score rising 11 points above the level registered before the conflict disrupted regional financial markets.

The recovery follows severe volatility earlier in the year. By June 9, about 72 per cent of rated sukuk had liquidity scores above 50, compared with 64 per cent on March 23. The proportion nevertheless remained below the 81 per cent recorded in January, showing that normalisation had remained incomplete after geopolitical risks pushed investors towards more readily tradable securities.

Trading conditions have strengthened as geopolitical risk premiums eased and investors returned to Gulf fixed income. Investment-grade GCC bond and sukuk spreads had moved broadly back towards pre-war levels by mid-June, although absolute borrowing costs remained higher because US Treasury yields continued to exert significant influence on regional debt pricing.

Sukuk have also gained importance within the Gulf’s broader financing system. The asset class accounted for about 41 per cent of debt capital markets outstanding in the GCC at the end of 2025, the highest proportion among major regions tracked globally. Outstanding sukuk worldwide had crossed $1 trillion by the end of that year after issuance reached roughly $300 billion during 2025.

Market growth slowed sharply during the first half of 2026 as geopolitical volatility and higher yields discouraged issuance. Sukuk issuance across the GCC, Malaysia, Indonesia, Turkiye and Pakistan fell 36 per cent year on year to about $125 billion. Global sukuk outstanding nevertheless increased 11 per cent to roughly $1.1 trillion, reflecting the growing stock of Islamic securities available to institutional investors.

Credit quality has remained comparatively resilient despite market turbulence. More than 80 per cent of rated sukuk were investment grade during the first half, while no sukuk defaults have been recorded since 2021. The proportion of issuers carrying stable rating outlooks fell to about 80 per cent, reflecting greater uncertainty surrounding regional economic and geopolitical conditions.