T

he government'€™s dollar-denominated Islamic-bond (sukuk) sale on Wednesday saw demand reaching almost seven times its US$1.5 billion offer, this despite its relatively low yield.

The Finance Ministry said in a statement that investors'€™ bids amounted to $10.2 billion, the largest order book ever achieved for a sovereign sukuk issue in Southeast Asia.

The latest global sukuk will mature in 10 years and offers a yield of 4.35 percent. By comparison, the last global sukuk issued in September matures in 5.5 years but offered a yield of 6.12 percent.

This means that the government is now enjoying reduced borrowing costs. In the bond market, longer-tenor bonds are perceived as carrying greater risk and normally have to offer higher yields, thus, leading to higher borrowing costs.

During the latest global sukuk offering, the demand from investors was so strong that the government had the '€œflexibility'€ to revise down the yields, said Robert Pakpahan, the director general of the Finance Ministry'€™s debt management office.

The initial price guidance was set at 4.62 percent, but the government eventually revised down the global sukuk'€™s yield to 4.35 percent in response to the robust interest, indicating that the bonds were rated as having a higher premium, he said.

'€œAmid fears of tightening global liquidity ahead of the normalization of the US monetary stimulus, I note that the credit story of Indonesia still stands out among foreign investors,'€ Robert said on Wednesday in Jakarta.

Investors from Middle-East countries were the biggest buyers for Indonesia'€™s global sukuk, accounting for 35 percent of the sales allocation, followed by Asian investors (30 percent), American (20 percent) and European (15 percent).

The global sukuk would be the last foreign currency-denominated bonds issued by the Finance Ministry this year, he said, noting that the government so far had already raised 79 percent of its overall bond-issue target of Rp 430 trillion this year.

The last time Indonesia issued foreign-currency bonds was in July, when it reaped ¤1 billion (US$1.4 billion) from the sale of eurobonds. Incoming bids at that time topped ¤6.7 billion, which also represented an over-subscription of almost seven times.

Indonesia has also seen the spread between the yields of the global sukuk and US Treasuries narrow, indicating a better investment environment in Southeast Asia'€™s largest economy.

The spread of yields between US Treasuries and Indonesia'€™s latest dollar sukuk was 194.3 basis points, data from the Finance Ministry show.

By comparison, the spread between the US treasuries and Indonesia'€™s 10-year conventional dollar bonds sold in January, which offered a yield of 5.95 percent, was 296 basis points.

'€œThe potential for spread compression of Indonesian government bond yields over US Treasury yields is brought about by optimism for reform,'€ Eugene Leow, a fixed-income analyst with DBS Bank, said on Thursday in an email interview from Singapore.

'€œAt current yield levels, Indonesian dollar bonds are attractive relative to US Treasuries,'€ he added.