Harmony and Discord: Unraveling the response of Yields of Fixed Income Securities against Economic Instabilities

Abstract

In the times of macroeconomic and financial instability, governments are prone to issue excessive fixed-income securities in local as well as international markets while offering excessive rates of returns to fill their financing gaps. Therefore. this study aims to investigate the effect of the prevalent macroeconomic and financial instability of a country on the yields of Sukuk (Islamic bonds) and conventional bonds. The study collects the monthly data from Pakistan for the period 2015 to 2022 considering that the country has been facing such economic instabilities for the last few years. The findings reveal that there is a positive effect of inflation, interest rate, and the risk premium on the yields of both conventional and sukuk bonds. However, foreign exchange volatility and the performance of the stock exchange affect the conventional yield negatively. This study revealed lucrative prospects for investors who choose to invest in fixed-income assets, in terms of diversification gains by investing in both conventional and Sukuk bonds.