Foreign Clientele Effects in Malaysian Sovereign Bond Markets

The demand for Malaysian Islamic bonds (Sukuk), in the largest and most active Islamic market in the world, comes from two sources: conventional and Islamic investors, with the latter group holding only Islamic bonds by mandate. Surprisingly, Malaysian Islamic sovereign bonds have a 4.8 bps higher yield than their conventional counterparts, ceteris paribus. We attribute this spread to foreign institutional investors participating actively in the conventional market, but not as much in the Islamic market. Using transaction-level data, we document four pieces of evidence that point towards clientele effects, particularly for foreign investors, which affect the yield spread.