There is a paradox in the government sukuk markets in Indonesia. The country saw its sovereign rating recently raised to investment grade, BBB-, from BB+ and there has been a lot of demand for the country's conventional bonds, but at the same time the government's sukuk offerings have received bids, but presumably at a higher yield than the government is willing to accept. In July, a sukuk auction attracted 1.217 trillion rupiah ($129.33 million) in bids, but failed to sell any of the 6-month Shari'ah T-bills and 6-, 10-, 15- and 25-year project based sukuk.
Last week, the government received 1.933 trillion rupiah ($204 million) in bids for 6-month Shari'ah T-Bills and 10-, 15- and 25-year project based sukuk but sold only the 25-year sukuk (540 billion rupiah, above the targeted 500 billion rupiah).
The often stated reason for the auction failures is a lack of secondary market liquidity which makes sense: if investors do not expect a secondary market to be active enough for them to sell their holdings without incurring a significant loss from a wide bid-offer spread, they will demand a higher yield to compensate for this illiquidity. This will put most bids at auction above the yields for Indonesia's conventional bond issuance, and the government is unwilling to pay a premium for similar maturity sukuk.
What that doesn't explain, however, is why the government was able to sell sukuk in August that it failed to sell in July and why the longer tenor sukuk sold and the shorter tenor sukuk did not. It is reasonable to expect that the illiquidity premium on sukuk to rise as the tenor lengthens because investors will be more likely to have the ability to hold shorter-tenor sukuk to maturity. That makes for a puzzle about why the government sold 25-year sukuk in an auction but failed to sell 6-month T-bills.
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