Islamic bonds trailed emerging-market debt for a second year as foreign funds chased higher yields, a trend that Union Investment Privatfonds says is likely to continue this year.
Global Sharia-compliant notes gained 9.6 per cent last year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, compared with 18.5 per cent for developing-nation securities, JPMorgan Chase's EMBI Global Composite Index shows. The average yield on dollar sukuk dropped 1.18 percentage points to 2.81 per cent, while that for emerging-market paper fell 1.58 percentage points to 4.5 per cent, the two gauges revealed.
Developing-nation bond funds extended their inflow streak to 28 weeks in the period ending December 21, the researcher EPFR Global said, fuelled by monetary easing in the United States, Japan and the euro zone.
Debt from investment-grade Malaysia, which accounts for 62 per cent of outstanding sukuk, returned 11 per cent last year, compared with 19 per cent for Russia and 17 per cent for Peru, JPMorgan indexes revealed.
"This year can be characterised as the hunt-for-yield year," Sergey Dergachev, a Frankfurt-based senior portfolio manager at Union Investment Privatfonds said. "The chance to see this trend continue, where everything that has yield on it performs well, is very good."
Sukuk returns trailed developing-nation bonds by just 1.3 percentage points in 2011, after beating them by 0.8 percentage point the year before, the HSBC/Nasdaq and JPMorgan gauges show.
The average yield on global Islamic notes reached a record low of 2.76 per cent on November 30, according to the HSBC/Nasdaq index.
The gap between the average yield and the London interbank offered rate, or Libor, shrunk 91 basis points, or 0.92 percentage point, to 182 basis points last year.
Falling yields have helped to push worldwide sales of debt that comply with Islam's ban on interest to an unprecedented US$46.3 billion last year, surpassing the record of $36.7 billion, data compiled by Bloomberg shows.
Sales may be even higher this year as new countries including Oman, Tunisia and Egypt tap the Sharia-compliant capital market for the first time, CIMB Group Holdings and OCBC Al-Amin Bank said last month.
Foreign funds boosted their holdings of Malaysian government securities by 29 per cent to a record 221.9 billion ringgit last year through October, the central bank said.
Overseas investors increased ownership of Indonesian sovereign bonds by 21 per cent to 270.5 trillion rupiah last year, finance ministry figures show.
* Bloomberg News