The Jakarta Post
The bids were robust during a biweekly sukuk auction on Tuesday but the Finance Ministry decided not to absorb too many funds as investors demanded high yields, which could eventually increase the government's borrowing costs.
The ministry raised Rp 1.02 trillion (US$87 million) in the auction, falling short of its Rp 1.5 trillion target, it said in a statement.
This means that the government failed to repeat the success during the Aug. 26 sukuk auction, when it succeeded in meeting its indicative issuance target for sharia-compliant rupiah notes for the first time in five months.
While the government failed to meet its indicative target, the sukuk auction on Tuesday was more than two times oversubscribed. Incoming bids topped Rp 3.99 trillion, not too far from the Rp 4.1 trillion recorded during the previous sukuk auction also held last month.
The government decided to raise fewer funds than planned because some of the yields tabled by investors were just too high, Loto S. Ginting, director of government bonds with the Finance Ministry, said in a phone interview.
The government offered three types of sharia-compliant notes: six-month sharia treasury bills (T-bills) as well as sukuk maturing in six and 28.5 years' time.
During the auction, investors demanded yields as high as 8.75 percent for the sukuk maturing in six years.
However, for the six-year notes, weighted average yields ' the average yield demanded by investors ' stood at 8.25 percent, not far off the 8.26 percent recorded in the previous sukuk auction.
Still, the latest auction showed that investors had demanded higher premiums during the previous auction because average yields in the secondary market were lower than the aforementioned figures, noted Dini Agmivia Anggraeni, a fixed-income analyst with Maybank Kim Eng Securities.
Investors tabled higher yields because they currently had a perception that 'yields may head higher on expectations of a fuel-price hike in November', she explained Tuesday in a phone interview.
The movement of bond yields is sensitive to real interest rates in the economy. A fuel-price hike will drive up inflation, consequently giving eroding bondholders' returns and, thus, putting upward pressure on yields.
'There might be constraints for government bond yields to rally further from their current level,' Dini noted.
Particularly for sukuk, there might be liquidity risk concerning investors because, in the secondary market, the bonds were not that liquid and more difficult to trade compared to conventional bonds, she added.
Sukuk adhere to Islamic principles that forbid interest payments, instead offering investors ownership in various government assets and infrastructure projects as collateral.
While the sales of rupiah sukuk onshore have resulted in a string of failures, the latest offshore sales of Indonesia's dollar-denominated sukuk have proven to be a great success.
Last week, the Finance Ministry raised $1.5 billion from selling dollar sukuk with a maturity of 10 years and yields of 4.35 percent, the lowest level in two years.
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