Sukuk Yields on the Slide as Govt Swamped With Eager Investors

By webadmin on 08:48 pm May 27, 2012
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Yudith Ho

Yields on Indonesia’s Islamic bonds posted their first weekly decline this month on speculation supply will wane after the government rejected bids at an auction for the first time since March.

The yield on the 5.45 percent sukuk due January 2022 fell one basis point this week to 6.72 percent, the first drop since the period ending April 29.

The spread between the security and Malaysia’s benchmark 10-year Shariah-compliant note narrowed one basis point to 298 basis points during the week.

The government has met 92 percent of its Rp 40 trillion ($4.3 billion) sukuk sales target for 2012, giving it room to support the market and reduce benchmark borrowing costs by curbing supply. While the Finance Ministry sold Rp 550 billion of Islamic bonds on Tuesday, short of its Rp 1 trillion goal, bids exceeded the amount offered by 2.6 times.

“The government can now prioritize cost over issue size,” Handy Yunianto, the Jakarta-based head of fixed-income research at Mandiri Sekuritas, a subsidiary of the nation’s largest bank by assets, said on Wednesday. “We may see supply decrease in the second half because the government has issued so much debt in the early part of the year.”

The latest auction followed three consecutive sales where the government sold an average of 1.6 times its indicated target. The Finance Ministry took advantage of lower yields after Moody’s Investors Service restored Indonesia’s credit rating to investment grade in January, Dahlan Siamat, the director of Islamic financing at the debt management office, said earlier this month.

In the past few weeks, Europe’s worsening debt crisis and signs of a slowdown in China have deterred risk-taking, prompting investors to pull $341 million from Indonesian sovereign bonds this month through May 21, according to Finance Ministry data. The rupiah has weakened 2.5 percent this month even as Bank Indonesia has said repeatedly that it is intervening to support the currency.

The central bank held its reference rate at a record low of 5.75 percent on May 10 for a third month to support growth after official data three days earlier showed Southeast Asia’s largest economy expanded 6.3 percent in the three months through March from a year earlier, the slowest pace since the third quarter of 2010.

Global sales of securities that comply with Islam’s ban on interest reached $16.6 billion this year from $7.5 billion a year earlier, according to data compiled by Bloomberg. Sales totaled a record $36.3 billion in 2011.

Shariah-compliant debt worldwide returned 3.2 percent in 2012, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while debt from developing markets gained 4 percent, JPMorgan Chase & Co.’s EMBI Global Composite Index shows.

Indonesian consumer-price gains accelerated to 4.5 percent in April from a year earlier, the most since September, even after policy makers rejected the administration’s bid to increase the price of subsidized fuel.

“The current yields are fair but we’re seeing very little real return,” Herbie Mohede, a portfolio manager at Samuel Aset Manajemen, which oversees more than Rp 700 billion of assets, said on Wednesday. “Inflation as driven by the depreciating currency is a major concern for us.”

Average daily trading volumes for Indonesian sukuk have more than tripled to Rp 627 billion in the first four months of the year, compared with Rp 174 billion in all of 2011. The spread between the 6.25 percent Shariah-compliant note due 2015 and a similar-maturity non-Islamic bond narrowed 31 basis points this quarter to 21 basis points on Thursday, data compiled by Bloomberg show. The gap will probably converge in less than five years as secondary-market sukuk trading continues to increase, the debt office’s Dahlan said.

Global sukuk yields dropped one basis point, or 0.01 percentage point, to 3.81 percent on Thursday, according to the HSBC/Nasdaq index. The difference between the average yield and the London interbank offered rate, narrowed three basis points to 265 basis points.

The premium investors demand to hold Indonesia’s 8.8 percent global Islamic bonds due 2014 over Malaysia’s 3.928 percent dollar notes due 2015 widened four basis points to 90 basis points on Friday, according to data compiled by Bloomberg.

Indonesia’s Finance Ministry rejected all offers for 15-year Islamic securities at this week’s auction as investors demanded coupon rates of between 6.97 percent and 8.25 percent, compared with a yield of 6.90 percent on the 6 percent note due January 2027 on the day of the sale. The government paid one basis point more than the secondary market rate at the May 8 auction for a bond of the same maturity.

“It will be a show of strength between investors and the government going forward,” Mandiri’s Handy said. “Indonesia will hold off granting higher yields as long as it believes the current global condition is temporary. It can wait until the market improves.”