Malaysia's Five-Year Bonds Slide as Sukuk Yields More Attractive

  • Islamic notes sold at 16 basis-point premium to conventional
  • Quickening inflation also damped market demand: CIMB

Malaysia’s five-year government bondsdropped for a fourth day in the longest run of losses in two months on speculation investors switched into higher-yielding Islamic debt after inflation quickened.

The Treasury sold 2021 sukuk at a yield of 3.743 percent Thursday, attracting orders for 2.85 times the amount offered, which Bloomberg-compiled data show was the highest bid-to-cover ratio since March. The yield on the conventional notes due in 2020, the current five-year benchmark, climbed to 3.58 percent. That’s the highest this year.

Consumer prices rose in January at the fastest pace in almost two years, eroding returns on Malaysian bonds. Khoon Goh, a senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore, said on Wednesday that there’s concern inflation will accelerate further and when combined with a slump in oil poses risks to economic growth.

“Some investors could be selling the five-year conventional bonds to buy the Islamic notes as they offer higher yields,” said Nik Mukharriz Muhammad, a Kuala Lumpur-based fixed-income analyst at the investment-banking unit of CIMB Group Holdings Bhd., the country’s second-biggest lender by assets. “Concern over accelerating inflation could also be another factor for the selldown.”

Consumer prices rose 3.5 percent from a year earlier in January, the most since March 2014 but less than the 3.7 percent forecast in a Bloomberg survey, official data showed on Wednesday.

The yield on the 2020 conventional debt was up one basis point in Kuala Lumpur, closing at the highest level since Dec. 21, according to Bursa Malaysia prices. The Treasury sold 3.5 billion ringgit ($829 million) of the Islamic bonds and is scheduled to sell 15- and 30-year securities next month, as well as 10-year sukuk, according to the central bank’s calendar.

The ringgitgained 0.1 percent to 4.2195 a dollar. It dropped 0.6 percent Wednesday to a four-week low as its oil-related losses were exacerbated by the fastest inflation data.

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