YIELD CURVES

Yield curve is the relation between the cost of borrowing and the time to maturity of a security for a given issuer. Yield curves for Islamic securities and conventional bonds issued by various issuers are plotted here in four figures. As Figure 7.1 suggests, the yield of government Islamic issues (Gil) is higher than that of conventional bonds issued by the same issuer (Malaysian government securities, or MGS). The difference between the sukuk yield and the conventional bond yield tends to be larger for maturities between 2 years and 15 years. The maximum difference between the

Yield Curve of Government-Issued Securities (Conventional Bonds versus Sukuk)

FIGURE 7.1 Yield Curve of Government-Issued Securities (Conventional Bonds versus Sukuk)

yields of sukuk securities and conventional bonds issued by the government occurs for securities with 3 years' maturity, and the difference is 6.86 basis points.

Figure 7.1 also depicts the yield curve of the BNM-issued sukuk securities and conventional bonds. These securities are issued only with up to two years' maturity. As the graph shows, the yield of sukuk is higher than that of conventional bonds, for all maturities. Moreover, the difference between these yields increases as the maturity of the pair of securities increases. The maximum difference between the yield of sukuk securities and that conventional bonds issued by BNM is 5.30 basis points for securities with two years' maturity.

Figure 7.2 shows the yield curves for securities issued by quasi-government firms, or government agencies: Cagamas and Khazanah Nasional. The yield of sukuk securities issued by Cagamas is higher than the yield of Cagamas's conventional bonds. This difference increases as the tenure period of the securities grows beyond five years. The maximum

Yield Curve of Government Agency-Issued Securities (Conventional Bonds versus Sukuk)

FIGURE 7.2 Yield Curve of Government Agency-Issued Securities (Conventional Bonds versus Sukuk)

difference between the yields issued by Cagamas occurs for securities with 20 years' maturity; it is 6.44 basis points. In contrast to Cagamas securities, Khazanah Nasional issued securities that show a very small difference in yield. The maximum difference between the yields of securities issued by Khazanah Nasional is for securities with one or two years' maturity; it is -1.52 basis points. The yield is lower for sukuk.

Figure 7.3 shows the yield curves for securities issued by AAA-rated financial institutions. The yield of Islamic securities tends to be very close to the yield of conventional bonds for securities with less than 10 years' maturity. However, for securities with longer maturity periods, the sukuk yield is higher than the conventional bond yield. The maximum difference between the yields of securities issued by AAA-rated financial institutions is for 20 years' maturity; it is 7.59 basis points.

Figure 7.4 shows the yield curves for securities issued by AAA-rated corporations. The yield curve is generated for both guaranteed securities and general forms of securities. For corporate issues, the yield of sukuk securities is less than the yield of conventional bonds with less

Yield Curve of AAA-Rated Financial Institution-Issued Securities (Conventional Bonds versus Sukuk)

FIGURE 7.3 Yield Curve of AAA-Rated Financial Institution-Issued Securities (Conventional Bonds versus Sukuk)

than 10 years' maturity. However, the yield of sukuk securities is more than the yield of conventional bonds with more than 10 years' maturity. The maximum difference between the yields of Islamic securities and conventional bonds issued by corporate issuers with less than 10 years' maturity is for securities with 2 years' maturity; it is -8.69 basis points. However, the maximum amount of this figure for securities with longer than 10 years' maturity is 10.56 basis points for securities with 20 years' maturity.

For corporate-guaranteed issues, the yield appears to be less than the yield of conventional bonds with less than 15 years' maturity. However, the yield of sukuk securities is more than the yield of conventional bonds with 15 years' maturity or more. The maximum difference between the yields of guaranteed sukuk securities and conventional guaranteed bonds issued by corporate issuers with less than 15 years' maturity is observed for securities with 2 years' maturity; it is -7.07 basis points. However, the maximum amount of this figure for securities with longer than 10 years' maturity is 3.76 basis points for securities with 20 years' maturity.

Yield Curve of AAA-Rated Corporate-Issued Securities (Conventional Bonds versus Sukuk)

FIGURE 7.4 Yield Curve of AAA-Rated Corporate-Issued Securities (Conventional Bonds versus Sukuk)

 
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