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Asian dollar Sukuk yield slumps
Published in The Saudi Gazette on 28 - 08 - 2010

Yields on Asia's dollar Islamic bonds have slumped to the lowest levels in three months relative to local-currency debt on evidence that the US economic recovery is flagging as growth accelerates across the region.
The difference between the yield on the Malaysian government's 3.928 percent five-year dollar Sukuk and the similar-maturity 3.86 percent ringgit Islamic note widened five basis points this month to 67, prices from Bursa Malaysia and Royal Bank of Scotland Group Plc show. The gap grew 52 basis points in July and reached 76 on Aug. 19, the most since the dollar bonds were sold in May.
OSK-UOB Unit Trust Management Bhd. and HwangDBS Investment Management Bhd. said Islamic dollar notes may keep rising as new issuance slows and demand climbs for foreign-currency securities from global emerging-market funds. The drop in yields on local- currency debt has been limited as the biggest economies in Southeast Asia expanded at least 6 percent in the second quarter, almost three times faster than the US
“Investors think the economy is so bad in the US that interest rates will be kept low so they are coming to this region to get better yields,” Mohd Noor Hj A Rahman, the head of the Islamic unit of OSK-UOB in Kuala Lumpur, said on Thursday.
“In the domestic market, people would go for equity and not bonds when the economy is good.”
Government reports in the past three weeks showed Indonesia, Southeast Asia's largest economy, expanded 6.2 percent in the three months ended June 30, the fastest quarterly pace in almost two years, and Malaysia posted growth of 8.9 percent.
The yield spread between Indonesia's 8.8 percent dollar Islamic bond maturing in April 2014 and the 9.25 percent rupiah- denominated Sukuk due September 2015 widened 73 basis points this month to 484 and reached 493 on Aug. 19, the most since May 20, according to data compiled by Bloomberg.
Indonesia may sell dollar-denominated Sukuk in the first half of next year, Rahmat Waluyanto, director general at the finance ministry's debt management office, said. Islamic Development Bank, a multilateral lender based in Saudi Arabia, will sell $1 billion of Shariah-compliant notes under its US dollar Sukuk program in the fourth quarter to fund development projects, Vice President Abdul Aziz Al Hinai, told reporters in Kuala Lumpur on Aug. 24.
Investors have poured funds into dollar Sukuk after a rally in local currencies made the debt relatively cheap, Esther Teo, a Kuala Lumpur-based money manager at HwangDBS Investment, which oversees about $2.9 billion of funds including Islamic bonds and debt that doesn't comply with Shariah law, said in an interview yesterday.
The ringgit appreciated to a 13-year high on Aug. 23 and Indonesia's rupiah climbed to its strongest level since June 2007 on Aug. 3, Bloomberg data show.
The yield on Malaysia's dollar Islamic bonds dropped 19 basis points to 2.74 percent so far in August and touched a record-low of 2.63 percent on Aug. 24, according to RBS prices. The rate on the ringgit sukuk fell 17 basis points to 3.38 percent.
“We have seen lots of investors coming into Malaysia and investing in high-grade bonds,” said Teo. “There's a shortage of Sukuk supply.”
Islamic bonds, which are based on the exchange of asset flows to comply with the religion's ban on interest, returned 10 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in developing markets gained 13 percent, according to JPMorgan Chase & Co.'s EMBI Global Diversified Index.
The difference between the average yield for emerging market Sukuk and the London interbank offered rate has narrowed 60 basis points, or 0.60 percentage point, to 383 since the end of June, according to the HSBC/NASDAQ Dubai Sukuk Average Spread.
The risk that inflation will quicken this year as economic growth accelerates reduces the appeal of local-currency debt, said Ben Eeh, an analyst at Kumpulan Wang Persaraan, a Malaysian pension fund, which manages 60 billion ringgit ($19 billion) of assets.
“People go for the dollar bonds because they don't want to be exposed to the ups and downs of the local currency,” Eeh said. “Bear in mind you will have to take the inflation risk too if you want to hold the local bonds.”
Global sales of notes that comply with Shariah guidelines have dropped 13 percent to $10 billion so far this year, according to data compiled by Bloomberg.
Malaysia's government raised $1.25 billion from its first overseas Sukuk in eight years in May, attracting bids for more than five times the original offer of $1 billion.


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