Islamic bond yields dropped to a seven-year low this week and investors predict further declines as growth in Asia and the Gulf that’s outpacing the rest of the world shores up demand for sukuk.
Average yields fell five basis points, or 0.05 percentage point, this month to 3.39%, approaching the lowest level since January 2005, when they reached a record 3.33%, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.
South Korea unexpectedly cut interest rates this 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 climbed 73% in 2012 to $26.8bn from the same period last year as the decline in borrowing costs encouraged issuers such as Qatar and Dubai-based Emaar Properties to tap the market.
“Policy interest-rate cuts are lowering sukuk yields, together with falling inflationary pressure and cautious demand for risky assets,” Soon Teck Onn, the head of investment funds overseeing about $250mn at Zurich/Malaysian Assurance Alliance in Kuala Lumpur, said in an e-mail on Thursday.
“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.”
Inflows into emerging-market bond funds climbed to an eight-week high of $850mn in the week ended July 4, approaching $24bn for the year, according to the latest research from EPFR Global.
Funds favouring so-called hard currencies such as the dollar saw the biggest interest, the Cambridge, Massachusetts-based company said.