(MENAFN- Khaleej Times) A rally in Asian government sukuk that drove 10-year yields to record lows is faltering as investors switch to Arabian Gulf sovereign notes that offer higher returns.
Borrowing costs on Malaysia's 4.646 per cent bonds due 2021 rose 10 basis points to 2.74 per cent, after declining 116 basis points last year, data compiled by Bloomberg show.
That compares with rates of 3.99 per cent on Dubai's 6.45 per cent 10-year securities and 3.12 per cent for similar-maturity 4.211 per cent debt of state-owned Saudi Electricity Co.
"Asian dollar sukuk have underperformed Gulf bonds because investors are leaving no rock unturned in their quest for achieving higher yields," Malek Khodr Temsah, vice president of treasury and investment at Albaraka Banking Group BSC, said in a January 9 e-mail. "The Asian rally appears to have fizzled."
Investor thirst for yield that was the dominant theme in 2012 will persist in 2013 as central banks in the US, Europe and Japan keep interest rates near zero to spur economic growth, according to the Bahrain-based lender. Dubai said last week it plans to improve regulations for Islamic finance to attract more Shariah-compliant investment as it seeks to become a regional hub for the global $1.3 trillion industry.
The yield on Indonesia's 3.3 per cent debt maturing in 2022 climbed 25 basis points this year to 3.11 per cent, after touching a record of 2.86 per cent on January 2, 30 basis points above the all-time low for Malaysia's 2021 notes reached in November, according to data compiled by Bloomberg.
Borrowing costs on Dubai's 10-year sukuk due in 2022 dropped 33 basis points so far in 2013, while those on Saudi Electricity's bonds maturing the same year fell 12 basis points, according to data.
The sell-off in the Asian market will be short-lived given the credit quality of both Indonesia and Malaysia and the shortage of sovereign Islamic bonds in the region, Chan Cheh Shin, head of sukuk at OSK-UOB Islamic Fund Management Bhd. in Kuala Lumpur, said in a January 9 interview.
Moody's Investors Service and Fitch Ratings awarded Indonesia investment-grade status in the past 13 months, and the nation is ranked three levels below Malaysia by both companies.
The countries are the only two in Southeast Asia to have ever sold debt that complies with ban on interest. - Bloomberg
"There's really no reason for the sell down in Malaysian and Indonesian sukuk as there was no negative news," said Chan, who manages 850 million ringgit ($281 million) at OSK-UOB Islamic Fund Management. "If the yields rise further, investors may buy back the bonds."
Funds will keep looking for higher-yielding assets given the "overall consensus that ultra-easy monetary policy will continue well into 2013," said Temsah at Albaraka Banking.
Average yields on global Shariah-compliant debt in the Gulf Cooperation Council, which includes Saudi Arabia and the UAE, dropped 17 basis points so far this year to 2.75 per cent, according to the HSBC/Nasdaq Dubai GCC US Dollar Index. That compares with a 14 basis point decline to 2.67 per cent on the debt worldwide, a separate HSBC gauge shows.
The premium investors demand to hold sukuk sold in the international market over the London interbank offered rate, or Libor, has narrowed 130 basis points over the past 12 months to a five-year low of 160 basis points as of January 10, according to the HSBC gauge.
Islamic bonds returned 9.6 per cent last year, the HSBC/Nasdaq index shows, while emerging-market debt climbed 18.5 per cent, according to JPMorgan Chase & Co's EMBI Global Index.
Worldwide sales of Shariah-compliant bonds climbed 26 per cent to a record $46.3 billion in 2012, data compiled by Bloomberg show. In the GCC, issuance reached an all-time high of $21.3 billion, almost triple the $7.3 billion in 2011.
Shrinking yield premiums are also making the Indonesian and Malaysian sukuk less appealing as yields on 10-year US Treasuries have climbed this year, said Temsah.
Malaysia's 2021 securities offer a 99 basis point spread over US debt, down from 105 basis points at the end of last year and the 2012 high of 190, according to data compiled by Bloomberg. Indonesia's 2022 notes provided a 110 basis point premium, down from 171 basis points in November.
Investors are buying Dubai's sukuk on signs the economy is recovering from the property market slump in 2008, Mohamad Safri Shahul Hamid, the Kuala Lumpur-based deputy chief executive officer at CIMB Islamic Bank, a unit of CIMB Group Holdings Bhd., said in an e-mail on Thursday.
"Dubai is perceived to be moving in the right direction in terms of its economy," said Safri. "The hunt for yield without compromising credit will continue to dominate proceedings."
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