Amundi’s CIO Braces for 4% Sukuk Yields on Oil: Islamic Finance

Islamic global bond yields may rise more than one percentage point next year to approach 4 percent on a double blow from falling oil prices and rising U.S. borrowing costs, Amundi Asset Management says.

The average yield on dollar sukuk has climbed 23 basis points to 2.99 percent so far in December, heading for the biggest monthly increase since August 2013, according to a Deutsche Bank AG index. Yields could test 4 percent next year if the U.S. economy improves “tremendously” and the Federal Reserve raises interest rates, said Ahmad Najib Nazlan, chief investment officer for conventional and Islamic fixed income at Amundi Malaysia.

Gulf Cooperation Council members, including Saudi Arabia and Bahrain, may have to tap the sukuk market for financing as their oil revenue declines, Najib said in a Dec. 12 interview. Prospects for the Malaysian economy won’t be rosy in 2015 because the oil price will weigh on the current account, Najib said, adding that he intends to go underweight government bonds.

“I definitely see a correction in sukuk in the coming quarters if oil prices remain at this level,” said Kuala Lumpur-based Najib at Amundi, which oversees $1.3 trillion globally. “We have seen some names reducing positions in the market already.”

Amundi became the biggest foreign-asset management fund in Malaysia after it bought Kuala Lumpur-based KAF Fund Management in March, Najib said. It manages 14 billion ringgit ($4 billion) in the Southeast Asian nation and is the biggest asset manager in Europe, he said.

Treasury Yields

The International Monetary Fund warned in October, when Brent crude was above $85 a barrel in comparison to $61 now, that oil-exporting countries could see their fiscal surpluses move into deficits if prices stayed low for a prolonged period.

Global sukuk yields are currently the highest since May 6 and are up from the year’s low of 2.76 percent on Nov. 28. Brent has slumped 47 percent from 2014’s high in June after the Organization of Petroleum Exporting Countries, which includes Saudi Arabia, refused to cut production at a meeting in Vienna last month to halt the slide.

Ten-year U.S. Treasury yields peaked at 4 percent in 2009 and are currently 2.11 percent. Rates will head higher once the Fed starts to raise interest rates in 2015, Najib said.

Zulkiflee Mohd. Nidzam, head of foreign exchange and bond trading at Kuala Lumpur-based Asian Finance Bank Bhd., predicts sukuk yields will rise to 3.5 percent at the most in 2015.

“I don’t think the governments in the Middle East will allow yields to rise too fast,” Zulkiflee said in a phone interview yesterday. “Furthermore, they can always cut oil production to relieve the burden of higher borrowing costs.”

Fund Spending

Sales of Shariah-compliant securities in the GCC will probably rise next year as governments and corporates may find it more efficient to tap the sukuk market to fund spending, Najib said. Some companies may also refinance their existing debt early to take advantage of lower borrowing costs before the Fed tightens, he said.

Global issuance of bonds that pay returns on assets to comply with Islam’s ban on interest climbed 6.8 percent this year to $45.3 billion, near 2012’s unprecedented $46.8 billion, according to data compiled by Bloomberg. GCC sales amount to $14.9 billion of the total, down 30 percent from a year earlier. Offerings in Malaysia, the world’s biggest sukuk market, rose 41 percent to 57 billion ringgit

The ringgit has dropped 6.1 percent this quarter, the worst performance in Southeast Asia, on concern the decline in crude oil will dent government revenue in a nation that’s a net exporter of the fuel.

Overweight Corporates

The surplus in the country’s current account, the broadest measure of trade, shrank to 7.6 billion ringgit last quarter, the least since June 2013. The government is aiming to reduce its fiscal deficit to 3 percent of gross domestic product next year from 3.5 percent, having run a shortfall since 1998.

“We prefer to be invested in sukuk with a maturity of five to seven years and will probably diversify from credits that are oil-related,” Amundi’s Najib said. “In Malaysia, we are light on govvies and overweight on selective corporates.”

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