Govt fails again in sukuk
auction on inflation fears

The Finance Ministry’s debt management failed to meet its target in the offering of Islamic bonds (sukuk) on Tuesday, the second time since mid February, as investors demanded yields higher than the government’s offer due to accelerating inflation.

The government raised only Rp 760 billion (US$78.4 million) in the auction, half of its indicative target of Rp 1.5 trillion, although total incoming bids topped Rp 3.38 trillion. It was the second consecutive time the government has failed to meet its sukuk issuance target this year after raising only Rp 1.05 trillion during an auction on Feb. 19.

Most of the funds reaped from Tuesday’s auction came from the 6-month Islamic treasury bills, from which the government successfully raised Rp 720 billion. The rest came from the 9-year and 14-year sukuk, which raised Rp 10 billion and Rp 30 billion, respectively. The 5-year and 24-year notes, which were also offered at the auction, went unsold.

“Today’s auction was affected by the issuance of retail sukuk SR004 that raised Rp 14.9 trillion last week, coupled with the impact of surging inflation in February, thus causing investors to demand a higher yield,” Dahlan Siamat, the director of Islamic financing policy at the Finance Ministry’s debt management office, wrote in a text message on Tuesday.

Analysts previously said that investors in the Islamic bond market had turned to invest in the government’s retail sukuk — a three-year sharia note that offers a six percent annual interest rate that carries a face value of between Rp 5 million to Rp 5 billion — consequently soaking up their interest in the conventional sukuk.

Inflation — considered a major factor affecting the yield of government bonds — topped 5.3 percent in February, the highest level in 20 months, well above the estimates of policymakers and economists.

However, Ezra Nazula, the head of fixed income with Manulife Assets Management, predicted that inflationary pressure would lessen in the upcoming months, citing better weather and the harvest season, eventually pushing down yields in the government bonds market.

Ezra added that, in Tuesday’s auction, there were signs that investors were expecting an increase of Bank Indonesia’s overnight facility rate (Fasbi), as evinced by the increase in yield for short-tenor sukuk.

 He pointed to the fact that the weighted average yield for the six-month Islamic treasury bills rose to 4.068 percent, 0.03 percent higher than the auction on Feb. 5.

“They [investors] are seeing the likely increase in Fasbi as the central bank attempts to control inflation and stabilize the currency,” he said on Tuesday in a phone interview. “And any increase in Fasbi will lead to higher yields for alternative investments, such as term deposits, which might eventually be deemed as more attractive for investors [compared to government bonds].”

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