T

he government canceled the sale of Islamic bonds, or sukuk, on Tuesday in its first-ever sukuk auction, after investors demanded higher yields, according to the Finance Ministry.

The government initially planned to sell Rp 1.5 trillion (US$158.69 million) of sukuk, but it scrapped the sale on higher-than-expected yield demand, Finance Ministry's director general of debt management Rahmat Waluyanto told reporters.

The government received a total offer of Rp 5.08 trillion. Rp 1.57 trillion was for the six-year IFR0003, with a yield of between 9.75 percent and 11.5 percent; and Rp 3.51 trillion for the 11-year IFR0004, with a yield of 10.5 percent to 12.5 percent.

By comparison, the yield of six-year government bonds on Oct. 12 was 9.24 percent, while the yield of 10-year government bonds was 9.94 percent, data from the Inter Dealer Market Association (Himdasun) and Bloomberg revealed, as presented by the ministry.

"The yields requested were higher than our own estimates, which were based on several factors: Real data in the market, judgment of market conditions, outlook," said Rahmat.

"If forced to do the auction today, we would be not prudent and might damage investor confidence as we *would have* issued *bonds* with really high yields."

Rahmat said perhaps conventional investors, who still dominated the offers, drove other investors to ask for higher yields.

"But it doesn't mean we have to bow *to them*. Instead we have to provide the right signal," he said.

Analysts said the government made the right move to cancel the sale, as high yields mean high costs for the government to service.

Tuesday's sukuk sale was the first to be carried out through an auction, with previous issuances having been sold through banks.

The government first sold Islamic bonds in August last year amounting to Rp 4.7 trillion. It then issued its first retail sukuk in February, receiving orders of Rp 5.56 trillion.

The first-ever sale of dollar-denominated sukuk was carried out in April, raising $650 million.

Also on Tuesday, Rahmat said foreign ownership of bonds rose Rp 6.11 trillion to Rp 99.33 trillion as of Oct. 12 from the end of September, indicating that foreign investors were starting to look at Indonesia to place their money.