Monday, October 25, 2010

Sovereign Bonds – The Fundamentals

This article appeared in Capital page of The Edge Malaysia, Sep 27 - Oct 2,2010

By Jasvin Josen
Malaysia was in the limelight in June this year when its global Islamic Note (or Sukuk) was oversubscribed by over four times. The 5-year bond was awarded a stable rating of “A-“  by Standard & Poor ‘s and “A3” by Moody’s and managed to attract a yield of 3.928%, just 180 basis points (1.8%) over 5-year U.S. Treasuries. On Aug. 25, Bloomberg reported that the yield had dropped to a record- low of 2.63%. Concurrently, the yield on Indonesia’s 2014 Sukuk also reached an all-time low of 2.543% on Aug. 19.
What does the yield represent and why is a drop in yield perceived as good news? In this article, I will describe some basic characteristics of bonds in general before advancing to specific aspects of sovereign bonds. Islamic bonds and its unique features will be left for discussion at a later stage.