The German state of Saxony-Anhalt was in the spotlight in Europe on Monday as it sold a floating-rate note that conforms with Islamic law by not paying interest.
Elsewhere, record oil prices and renewed threats of attacks in the United States pushed European spreads slightly wider in subdued summer trading.
"We are about a basis point wider for choice," said one trader. "The Islamic bond was quite quirky but elsewhere it's dead."
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 51.1 basis points more than similarly dated government bonds at 1445 GMT, 0.1 basis points more on the day.
Saxony-Anhalt sold Europe's first Islamic bond, a 100 million euro five-year floating-rate note priced at 99.952 percent of face value. The rate of return was equal to six-month Euribor, while the spread was Euribor plus one basis point. The bond was designed to fall within Islamic law, which forbids interest payments. Instead, investors receive income based on profits from approved investments.
The bonds were based on a sale and lease-back scheme under which the German state will transfer rights on some state properties to a Dutch Foundation, Stichting Sachsen-Anhalt Trust, the issuer. The holders receive rent from the properties instead of interest. Saxony-Anhalt can buy back the rights to its properties after five years. Islamic bonds have previously been issued only by Muslim countries such as Malaysia and Qatar.
Elsewhere, European shares fell on Monday amid concern over rising oil prices and the threat of terrorism. US oil prices struck a new record peak, climbing close to $44 a barrel, after gaining around 37 percent this year.
Intelligence warnings of al Qaeda threats to attack the New York Stock Exchange, World Bank and International Monetary Fund prompted the United States to issue a "high" level threat alert for financial institutions in New York and Washington.
Widely held bonds of US auto makers, often a indicator of risk appetite, were marginally weaker with General Motors' 2033 euro-denominated bond quoted at 275 basis points over Bunds, about two basis points wider on the day, a trader said.
HBOS five-year credit default swaps were trading about half a basis point wider at 14.5 basis points, while Abbey was a basis point tighter at 15 basis points, a trader said. Santander was unchanged at 14 basis points, after tightening a couple of basis points following its bid announcement.