Islamic bonds slumped in November, snapping a five-month rally, as concern Europe’s debt crisis will spread reduced demand for higher-yielding assets in emerging markets.
Average yields on sukuk climbed 19 basis points, or 0.19 percentage point, in November to 5.04 percent, the highest level in two months, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Yields had dropped 194 basis points from May 31 until the end of October. The extra yield investors demand to hold non-Islamic emerging-market debt instead of U.S. Treasuries rose 22 basis points in the month to 267, according to JPMorgan Chase & Co.’s EMBI+ Index.
“The sukuk market doesn’t work in isolation,” Scott Lim, chief executive officer at Kuala Lumpur-based MIDF Amanah Asset Management Bhd., who oversees the equivalent of $670 million of assets, said in an interview Nov. 26. “Europe is having too many structural problems and this is only the beginning. It is going to be challenging for the bond market.”
The declines pared gains this year for Islamic bonds to 11.2 percent, compared with a 13.3 percent advance for debt in JPMorgan’s EMBI Global Diversified Index.
Ireland agreed over the weekend to an 85 billion euro ($112 billion) aid package from European governments to help shore up its banking system. Yields on Portugal and Spain’s 10-year government debt climbed to records this month on speculation those countries will follow Ireland in seeking a financial bailout.
Investor demand for the safety of German debt drove the extra yield investors demand to hold Portugal’s 10-year bonds over bunds to an all-time high of 460 points on Nov. 11. Spain’s premium widened to 286 points today, according to data compiled by Bloomberg. The difference between the average yield for sukuk and the London interbank offered rate narrowed 12 basis points in November to 349 basis points, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
“When looking at the euro-zone challenges, it is of course easy to see the gravitation of capital towards the safe havens,” Rafael Martinez Dalmau, the Singapore-based head of Shariah-compliant portfolio management at BNP Paribas, wrote in an e-mailed reply to questions on Nov. 29. “While the markets may suffer sporadic bouts of volatility, further gains in sukuk are likely to continue, albeit at a slower pace from what we have seen in the last few months.”
The yield on Malaysia’s 3.928 percent Islamic note due June 2015 fell three basis points to 2.87 percent today and climbed 38 basis points in November, according to prices provided by Royal Bank of Scotland Group. It has advanced 54 basis points from a record low of 2.33 percent on Nov. 4. The difference in yield between Dubai’s notes and Malaysia’s shrank three basis points today and narrowed 15 basis points this month to 379.
Sales of Shariah-compliant bonds, which pay returns on assets to comply with Islam’s ban on interest, have slumped 31 percent this year to $13.7 billion as debt restructurings and falling property prices in the Middle East hurt investor confidence. They reached a record $31 billion in 2007.
Sukuk offerings are likely to pick up next year as growth in Asia and the Persian Gulf continues to outpace Europe and the U.S., Dalmau wrote.
Asia’s developing economies will expand 8.4 percent in 2011, compared with 2.2 percent growth in advanced countries, the International Monetary Fund forecast on Oct. 6. Economies in the Middle East and North Africa will grow 5.1 percent next year, the IMF estimates.
Dubai’s government hired CIMB Investment Bank Bhd., a Kuala Lumpur-based unit of CIMB Group Holdings Bhd., as a lead manager to sell between $1 billion and $1.5 billion of sukuk, a person with knowledge of the plan said Nov. 24. Malaysian Prime Minister Najib Razak said Oct. 26 the Dubai Department of Finance is proposing a multi-currency sukuk program.
National Commercial Bank, Saudi Arabia’s largest lender, plans to sell its first Islamic bond in the second quarter of 2011, Abdulrazzak Elkhraijy, executive vice president and head of the Islamic banking development group, said in an interview in Manama, Bahrain, on Nov. 22.
“We do not expect new sukuk issuance to be affected only because the market is in a corrective phase,” BNP Paribas’ Rafael said.