Islamic bond yields rose to a two- month high in their worst weekly performance since January, as Europe’s deficit crisis and China’s slowing economy boosted demand for the relative safety of U.S. debt.
Global sukuk yields climbed nine basis points to 3.76 percent, a level last surpassed on March 1, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The premium over U.S. benchmark interest rates widened for a fifth week, the longest stretch since February 2010. Ten-year U.S. Treasury yields reached 1.74 percent, the least in seven months.
Investors in the $1 trillion Islamic finance industry say the risk of contagion in Europe may force potential sukuk issuers to delay sales as borrowing costs rise. A stalemate in Greece over forming a united government that backs austerity measures has raised concern the nation will exit the euro, shaving $2.2 trillion off global stock markets since a May 6 election failed.
“It’s a confidence issue,” Chan Cheh Shin, who manages 850 million ringgit ($273 million) as head of sukuk at OSK-UOB Islamic Fund Management Bhd. in Kuala Lumpur, said in an interview yesterday. “There’s concern that new sukuk issuances won’t be taken up in such a negative environment.”
The difference between average yields on sukuk and the London interbank offered rate, or Libor, increased seven basis points this week to 257 basis points, the highest since March 12, the HSBC/Nasdaq index shows. The spread was 241 basis points five weeks ago.
$2.5 Billion Pipeline
Sukuk issuers have announced plans to sell $2.5 billion of Shariah-compliant debt this month, according to data compiled by Bloomberg. Emirates Islamic Bank may issue $500 million, Al Khaleej reported on May 7, citing Chief Executive Officer Jamal bin Ghalaita. Qatar could raise about $2 billion through an offering, bankers familiar with the deal said on May 10, declining to be identified because the information is private.
An 11 percent decline in crude oil prices this month may slow new sukuk sales from the Middle East because of the risk revenue will decrease, said Chan.
All 36 of the global Islamic bonds listed in the HSBC index fell this week, with sukuk in Dubai seeing some of the biggest losses. The yield on the emirates 6.396 percent dollar notes due in November 2014 rose 32 basis points, or 0.32 percentage point, to 4.25 percent, according to data compiled by Bloomberg.
Higher Premiums
“The Greek situation is among the major global factors leading to risk-off trades and is undoubtedly spooking capital markets in the Gulf Cooperation Council,” Shehzad Janab, head of asset management at Daman Investments in Dubai, said in an interview yesterday. “Investors are asking for higher premiums in factoring in the global risk-off environment, coupled with a huge potential pipeline.”
Indonesia’s and Malaysia’s dollar-denominated Islamic bonds, which pay returns on assets to comply with the religion’s ban on interest, declined as the average cost to protect Asian sovereign debt from default increased.
Yields on Malaysia’s 3.928 percent sukuk maturing in 2015 rose 10 basis points this week to 1.97 percent, the highest level since April 12, according to data compiled by Bloomberg. The yield on Indonesia’s 8.8 percent notes climbed 11 basis points to 2.91 percent. The difference in yields between Dubai’s 6.396 percent securities due in November 2014 and Malaysia’s debt widened 19 basis points to 222 basis points.
Raise Cash Holdings
Five-year credit default swaps for 13 Asian sovereigns increased to an average of 221 basis points, the highest since January, according to data provider CMA, which compiles prices quoted by dealers in the privately negotiated market.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements. A basis point equals $1,000 annually in a contract protecting $10 million of debt.
“Events out of Europe definitely dented confidence among investors, who became more risk-averse,” Johar Amat, head of treasury at Kuala Lumpur-based OCBC Al Amin Bank Bhd., the Islamic unit of Singapore’s Oversea-Chinese Banking Corp., said in an interview yesterday. “Many decided to increase cash holdings vis-à-vis sukuk.”
The possibility of an exit by Greece from the single- European currency also damped demand at a Malaysian auction of ringgit-denominated sukuk this week. Investors bid for 1.94 times the 4.5 billion ringgit of the 10-year notes on offer May 14, the smallest bid-to-cover ratio in a year.
‘Flight to Safety’
Central bank Governor Zeti Akhtar Aziz said this week that a withdrawal from the euro by Greece could cause contagion comparable with the Asian financial crisis of 1997-1998.
“When one economy collapses, then the market usually moves on to focus on the next one, then there will be a contagion that will affect different countries that probably don’t deserve those kinds of consequences,” Zeti said in a Bloomberg Television interview from Istanbul, Turkey, on May 16.
China reported in the past week that growth in exports, factory output and new loans fell short of economists’ estimates in April. Shipments in Indonesia, Southeast Asia’s biggest economy, rose in March at less than a quarter of the pace a year earlier. In Malaysia, overseas sales contracted for the first time since November 2009.
Global issuance of Shariah-compliant bonds totaled $15 billion this year, more than double the $6.1 billion in the same period of 2011, data compiled by Bloomberg show. Offerings reached a record $36.3 billion last year.
Islamic bonds sold to international investors returned 3.3 percent in 2012, according to the HSBC/Nasdaq index, while debt in developing markets climbed 4.7 percent, JPMorgan Chase & Co.’s EMBI Global Composite Index shows.
“Sukuk yields have gone up due to risk-aversion,” Lum Choong Kuan, head of fixed-income research at Kuala Lumpur-based CIMB Investment Bank Bhd., said in an interview yesterday. “People are going back to basics in a flight to safety and buying back U.S. dollars.” - Bloomberg
(Business Times / 20 May 2012)
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