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Islamic Bond Yields Grow Over Rising Supply, Weak Demand

Average yield of 19 Islamic Treasury bills reached 27.3% by Saturday’s close, while average YTM for this year’s first quarter (March 21-June 21) was at 22.3%
The IFB debt market, where most of the Islamic bonds are sold, is currently worth over $13 billion.The IFB debt market, where most of the Islamic bonds are sold, is currently worth over $13 billion.

Average yield to maturity in the Iranian debt market has jumped in recent months and is now hovering above 27%.

The uptick is mainly due to lower demand for bonds caused by the growing attraction of parallel markets alongside the government's increased supply of debt.

Last fiscal year (March 2017-18) saw bond yields mostly fluctuating in line with changes in deposit interest rate, yet this fiscal has so far had other markets such as foreign exchange, gold coin and even equities overshadow bonds and safe havens for investors.

Statistics by our sister publication, Donya-e-Eqtesad, show that bond yields have had some of their most pronounced movements in the fourth month of the year, Tir (June 22-July 22). 

The average yield of 19 Islamic Treasury bills reached 27.3% by Saturday's close, while average YTM for the current fiscal year's first quarter (March 21-June 21) was at 22.3%.

The 5% rise is understandable while considering the recent price rally in nearly all the parallel markets. Millions were poured into forex and gold coin purchases as of March (prices were already growing since late November 2017) and equities also started to rise in June. In short, returns in other markets were too good to dissuade investors from selling their bonds.

In the course of this slowdown, new debt was being issued on Iran Fara Bourse. Last month saw three new batches of ITBs entering the market, namely "TB291", "TB301" and "TB311". Their price discovery brought their YTM to above 26%, a rate that steadily climbed its way to 27%.

The rising bond yield seems to signal the possibility of rising interest rates, too, as market rumors put it. If so, bond prices could be further pressured.

Boosting deposit rates also looked attractive for the government, as Mehr News Agency quoted a member of Money and Credit Council describing it as "a serious option to control the money supply problem."

Higher rates can be a step forward in barricading the rials from frenzied sales of forex and gold coin in recent months in banks' coffers, but the government can end up taking one step forward but two steps back.

The Central Bank of Iran cut rates back in September 2017 to 15% and 10% for one-year deposits and short-term ones respectively. Rates were spiking up to even 30% before the motion went into effect, and some non-compliers continued to offer up to 22% even after the CBI directive.

ITB yields followed suit. They were fluctuating above 20% in the last fiscal year's Q2, with returns on so-called Sakhab bonds reaching up to 30%. They quietly melted down in the last six months, however, to stand around 15%.

Yet with a currency shock on its hands, CBI decided to issue rial certificates of deposit with 20% YTM mid-February, making ITBs with 15-17% simply a less attractive option.

Investors naturally rushed in droves to not miss on the CDs' two-week sale period with 1.01 quadrillion rials ($22.5 billion) of them being bought during the first week only. Consequently, the devaluing debt market tried to catch up with average bond yields hitting above 20% as they entered the current fiscal year.

The IFB debt market is currently worth over $13 billion, according to data provided on the exchange's website.

< $285m in Monthly Yields 

The Central Securities Depository of Iran is set to pay investors in Islamic debt securities 12 trillion rials ($285 million) of yields during the fifth month of the current fiscal year (July 23-Aug. 22).

"Ijarah sukuks issued by Golgohar Mining and Industrial Complex, Joopar Passenger & Freight Trains Company, Rightel, Persepolis Tile Company, Telecommunications Company of Iran and Sabanaft Engineering and Construction Company will mature in Mordad [the fifth Iranian month]," Hadi Alipour, a CSDI official, said

Mordad will also witness the maturity of Musharaka Islamic securities sold by Rayan Saipa Leasing, Kordestan Cement, Iran & Shargh Leasing Company, and Shiraz, Tehran, Sabzevar, Mashhad and Karaj municipalities, ILNA reported.

Last but not least, yields will be paid over Murabaha sukuk issued by the Ministry of Cooperatives, Labor and Social Welfare, Ministry of Education and SAIPA.

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