The Maybank Islamic Bhd logo is displayed on a sign inside a branch at the company’s headquarters in Kuala Lumpur (file). The yield on Malaysia’s 10-year ringgit-denominated sukuk may test a record high.

 

Bloomberg

Kuala Lumpur

  

The yield on Malaysia’s 10-year ringgit-denominated sukuk may test a record 5% in 2014 as inflation quickens and the US cuts its stimulus, according to Manulife Asset Management Sdn. and Etiqa Insurance & Takaful.

The cost to borrow for a decade using Islamic sovereign debt climbed 80 basis points this year to 4.41%, more than three times the increase in yields on 2016 notes, a Bank Negara Malaysia index shows. Consumer prices rose 2.9% in November, the fastest in almost two years.

The administration of Prime Minister Najib Razak cut sugar and fuel subsidies this year and plans to increase electricity tariffs next month, which will push inflation beyond 3%, said Elsie Tham, a senior fund manager at Manulife Asset. The Kuala Lumpur-based insurers said they will also be monitoring the rate at which the Federal Reserve trims its bond purchases and the speed of the economic recovery in developed nations.

“Volatility in the sukuk market is to be expected given expectations for inflation and Fed tapering,” Tham, who oversees more than $1 billion, said in a phone interview. “While the action will be on the shorter-end, investors may ease back into sukuk with maturities of 10 years or above if yields climb to such attractive levels.”

Malaysia’s 10-year Islamic bond yield reached 4.44% on December 6, the highest in central bank data starting in 2010, after Fed Chairman Ben S Bernanke said he will cut monthly debt purchases by $10 billion to $75 billion in January. When making the announcement on December 18, he said interest rates would be kept near zero until inflation and unemployment improves. Ten- year US Treasury yields have climbed above 3% for the first time since July 2011.

Investors will favor Malaysian notes maturing in five years or less in 2014, Manulife’s Tham said. The three-year sukuk yield increased 21 basis points, or 0.21 percentage point, in 2013 to a five-month high of 3.45%, according to central bank data.

Borrowing costs in Malaysia are also on the rise as funds favor equities in developed markets over fixed-income securities given the improving global outlook, said Chris Eng, head of research at Etiqa Insurance. Such a scenario didn’t prevent the FTSE Bursa Malaysia KLCI index of shares from rising 10% this year to touch a record yesterday.

Etiqa and Asian Finance Investment Management Sdn. see the rise in yields being mitigated to a certain extent by Najib’s plan to rein in debt as he seeks to reduce the budget deficit to 3.5% of gross domestic product in 2014 from an estimated 4% this year.

The Bloomberg-AIBIM Bursa Malaysia Sovereign Shariah Index, which tracks the most-traded local-currency bonds, returned 1.3% to 111.7% in 2013, the smallest annual gain since the gauge was introduced in 2010. It climbed 4.3%.

Malaysia’s 10-year borrowing costs for non-Islamic bonds will increase about 50-60 basis points in 2014, and by a similar range for the sovereign sukuk, Eng said. He predicts 10-year US Treasury yields will climb by 50 basis points.

“We expect bond yields to rise in 2014 as the Fed’s tapering progresses and ahead of a potential US rate hike in 2015,” Eng said in an e-mail interview yesterday. “Barring another petrol price hike before September, expectations are for Malaysian inflation to remain below 4%.”

Overseas investors reduced ownership of the nation’s sovereign bonds to 235.5 billion ringgit ($72 billion) in October, down from a record 240 billion ringgit in May, according to the latest data published on the central bank’s website.

“Given the current environment, our strategy is to keep duration relatively short with valuations remaining key,” Fariza Taib, head of Islamic bond and local-currency investment at Kuala Lumpur-based Asian Islamic Investment, who oversees 1 billion ringgit, said in a December 27 e-mail interview. “The high foreign holdings of local government bonds increased Malaysia’s vulnerability.”