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Sukuk yields touch seven-year low

Published: 26/07/2012 08:36:00 PM GMT
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Kuala Lumpur: Sukuk (Islamic bond) is experiencing least of the yields as Sukuk yields have been declined to a seven-year low and it is expected to drop further.

By Farhan Iqbal

Kuala Lumpur: Sukuk (Islamic bond) is experiencing least of the yields as Sukuk yields have been declined to a seven-year low and it is expected to drop further.

According to the investors, yields from sukuk are likely to decline further after hitting a seven-year low as its growth in Asia and the Gulf region has substantially escalated demand for sukuk which is the highest in the world.

According to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, average yields fell five basis points, or 0.05 percentage point, in July to 3.39 percent, approaching the lowest level since January 2005, when they reached a record 3.33 percent.

South Korea unexpectedly cut interest rates last week, after central banks in China, the US and Europe eased monetary policy, prompting fund managers to hunt for higher-yielding assets.

Sukuk sales have increased 73 percent in 2012 to $26.8 billion from the same period last year as the decline in borrowing costs encouraged issuers such as Qatar and Dubai-based Emaar Properties PJSC to tap the market.

The Head of investment funds overseeing about $250 million at Zurich/Malaysian Assurance Alliance in Kuala Lumpur, Soon Teck Onn, said, “Policy interest-rate cuts are lowering sukuk yields, together with falling inflationary pressure and cautious demand for risky assets.”

“In view of a moderating global economic outlook, yields are likely to stay at record lows until we see inflation and the global economy rebounding,” he added.

According to the HSBC/Nasdaq Dubai GCC US Dollar Sukuk Index tracking 33 bonds, Average yields on Islamic notes from the Gulf Cooperation Council (GCC) are approaching record lows. Rates fell four basis points this month to 3.55 percent, 22 basis points shy of the all-time low set on December 31, 2004.

Albaraka’s Temsah commented, “The ever-tightening yields on Asian and GCC sukuk are the result of a perfect storm of ever-growing liquidity, increased sukuk participation by non-Islamic investors, and growth in sales that’s simply not keeping pace with the growth in balance sheets.”

“Buoyed by this structural shift in favour of emerging-market debt, GCC and Asian sukuk yields continue to grind even tighter,” he added.

Saudi Arabia, which plans to spend $500 billion to build homes, railways and roads in the largest Arab economy, announced in July the kingdom’s first mortgage legislation, spurring a rally in sukuk of Dar Al Arkan Real Estate Development Co.

The yield on the property developer’s 10.75 percent 2015 Islamic notes reached a record low of 7.42 percent on July 10.

Saudi Electricity’s sukuk also gained. The yield on the state-utility’s 4.211 percent notes maturing in April 2022 fell 13 basis points to 3.36 percent, the lowest since the debt was sold in March.

According to an HSBC index, Sukuk sold to international investors returned 5.4 percent in 2012, while debt in developing markets climbed 9.6 percent.

Sukuk demand is increasing in Asia and the Gulf region