Malaysian Sukuk Yields Drop on Second-Best Asian Currency: Islamic Finance

Islamic bonds in Malaysia are luring global investors seeking to profit from Asia’s second-best performing emerging-market currency, driving yields to lows.

The 5.9 percent Shariah-compliant notes maturing in December 2016 issued by Binariang GSM Sdn., owner of Malaysia’s largest mobile-phone operator, returned 10.4 percent so far this year, according to exchange operator Bursa Malaysia Bhd. The yield dropped seven basis points to 4.47 percent yesterday, the lowest since the debt was sold in December 2007. Malaysia’s 3.928 percent dollar-denominated sukuk due June 2015 returned 8 percent, prices from Royal Bank of Scotland Group Plc show.

Emerging markets will draw funds from abroad as developed nations pump cash into their slowing economies, increasing funds available to invest in higher-yielding assets, according to Bahrain Islamic Bank in Manama, CIMB-Principal Islamic Asset Management Bhd. and Credit Suisse Securities (Malaysia) Bhd. in Kuala Lumpur. The ringgit has rallied 10 percent this year against the dollar, the best advance after the Thai baht among the 10 most-active currencies in Asia outside of Japan.

“Currencies in Asia are still undervalued so you will continue to see investors buying bonds in this market,” Rohit Chawdhry, who oversees $350 million of assets at Bahrain Islamic Bank, the country’s second-largest Shariah-compliant lender, said in an interview yesterday. “Malaysian sukuk will continue to give higher returns, more because of the appreciating currency as the yields may not fall much further.”

Record Holdings

Sukuk issued by Malakoff Corp., a privately owned power producer based in Kuala Lumpur, has also beaten returns on Malaysia’s dollar-denominated notes this year.

Malakoff’s 6.08 percent Islamic bonds due April 2016 returned 16 percent, Bursa Malaysia prices show. The yield dropped to 5 percent when last traded on Sept. 3, the lowest level since June 2007. The yield on Rantau Abang Capital Bhd.’s 5.24 percent note maturing in September 2015 dropped to an all- time low of 3.67 percent on Oct. 1, as the securities returned 6.6 percent. Rantau is a unit of Khazanah Nasional Bhd., Malaysia’s state investment agency, set up especially to issue the debt.

International investors raised holdings of ringgit- denominated government debt to a record 63 billion ringgit ($20.4 billion) at the end of August, 54 percent more than at the end of last year, according to central bank data issued on its website on Sept. 30.

“Overseas investors will probably be here for another one to two years” until the U.S. recovers, Hang Tuah Amin Tajudin, assistant vice president at OCBC Bank (Malaysia) Bhd., said in an interview yesterday. “While they gain from currency appreciation, falling yields will benefit local issuers because they set a benchmark for issuance.”

Sales Drop

Global issuance of sukuk, which pay asset returns to comply with the religion’s ban on interest, fell 16 percent to $11.8 billion so far this year from the same period in 2009, data compiled by Bloomberg show. Sales in Malaysia, the world’s largest market for Shariah-compliant debt, dropped 26 percent to 19.3 billion ringgit, the least since the same period in 2006.

Sukuk returned 12 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Index, while bonds in developing markets gained 15 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate widened eight basis points yesterday to 348, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The spread shrank 120 basis points this year.

IFSB Initiative

Central bank governors and representatives from multinational institutions signed an agreement yesterday to set up the International Islamic Liquidity Management Corp., which will issue short-term money-market products to help Shariah- compliant banks manage funds, the Islamic Financial Services Board, a global standard-setting body for the industry, said in an e-mailed statement today.

The institution will be formally established on Oct. 25 in Kuala Lumpur, where the IFSB is based, it said.

The yield on Malaysia’s 3.928 percent dollar-denominated note has dropped 149 basis points, or 1.49 percentage points, since the debt was sold in June to reach 2.4 percent today, according to prices from RBS. The spread with the Dubai Department of Finance’s 6.396 percent sukuk due November 2014 has narrowed 61 basis points to 354 since June 30, Bloomberg data show. The Dubai notes yielded 5.98 percent today, down from 7.65 percent at the end of June.

‘Good Currency’

“The ringgit is a good currency to own,” said Zeid Ayer, who helps manage $1.6 billion of assets at CIMB Principal, whose firm is a joint venture between U.S.-based Principal Global Investors and Malaysia’s CIMB Group Holdings Bhd. “I would buy ringgit-denominated sukuk.”

Investors added $1.1 billion to funds dedicated to emerging-market debt in the week ended Oct. 6, according to an e-mailed statement today from EPFR Global, a Cambridge, Massachusetts-based research company. The inflows this year are more than $39 billion, it said.

“They have noticed the strength of the ringgit and the economy, and relative to what’s going on in the rest of the world things look rather attractive here in Malaysia,” Stephen Hagger, managing director of Credit Suisse Securities (Malaysia) Sdn., said in a telephone interview yesterday.

To contact the reporters on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

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