Clientele Effects in Sovereign Bonds : Evidence from the Malaysian Cash and Repo Markets

Controlling for bond characteristics and liquidity, clientele effects in Malaysian bonds cause Islamic sovereign bonds to have a 4.8 bps higher yield than their conventional counterparts. Using transaction-level bond data, we document three channels for these effects: First, from the selling of conventional bonds by foreign investors during the 2008-2009 crisis; Second, from the rise in foreign holdings, and the corresponding fall in bond yields, when Islamic bonds were added to the JP Morgan Emerging Market Bond Index; Third, from the active repo market with higher "specialness," that conventional sovereign bonds enjoy, which also leads to a wider yield spread