Spike in government bond yield

Soft ringgit and macro factors put selling pressure on Malaysian Government Securities

PETALING JAYA: A weaker ringgit coupled with external headwinds have caused yields for Malaysian Government Securities (MGS) to climb to as much as 50 basis points (bp) since July.

In over a month, the yield for 10-year MGS also saw a similar pattern, rising over 40bp from 3.9% to 4.31% – the highest since January 2010.

The yield for seven-year MGS increased by 50bp from a low of 3.8% to 4.3% yesterday.

Over the last few weeks, bond fund managers have said that the selling pressure on bonds has been quite high.

“The selling of the bonds is very dependent on where the ringgit is going. For example, yesterday, when the ringgit hit a low of RM4.15, selling was across the board for all tenures. I got hit on all my bids! With the ringgit stabilising today, the selling has also abated,” a head of fixed income told StarBiz yesterday.

In giving an indication on the intensity of the selling, he added that in the last one week, yields on the 10-year note have increased by 30bp.

The bond fund manager said some of the selling pressure could also be due to the maturing of some bonds this month.

“For example, we saw the maturity of an RM10bil bond last week. With the poor sentiment on the country, this led to some investors wanting to exit Malaysia and take their money back in dollars,” he said.

A debt capital head with a bank concurred that sentiment and uncertainties had pushed investors to the sidelines.

The People’s Bank of China’s move last week to increase the trading band to 2% had caused a ripple effect in the region, sending most Asian currencies weaker.

Next, people are waiting for the US Federal Reserve’s announcement on the widely anticipated rate hike.

“Investors want to wait until they see more clarity, but we can still see ample liquidity in the bond market,” he said.

One trader, however, pointed out that carry trades could see the high MGS yields as an opportunity to get higher returns.

But generally, more investors are putting their money in the US dollar space.

The concern that foreign investors have is the weakening ringgit.

“Foreign investors are not buying Malaysian bonds because they will lose money as long as the ringgit continues to soften. As for local investors, they can still hold on to the papers,” he said. Foreign holdings in MGS stood at 47% or RM166.8bil as at end-June and had fallen to RM165.44bil as at end-July, as foreigners sold various Malaysian assets over the past one month.

Outflows were seen across all debt instruments, which saw Government Investment Issues and MGS down by RM3bil in total in the month of July.

Including bonds issued by the private sector, foreign holdings reported net outflows of RM5.2bil as at end-July. Total foreign ownership came down by 2.45% to RM206.8bil from RM211.93bil in June. On a brighter note, Malaysia still has strong fundamentals, as reflected in the local banks’ robust capital and relatively strong economic growth in the region.

“Our gross domestic product has grown 4.9% in the second quarter, which has exceeded expectations. And the growth is much stronger compared to some of the regional peers,” said the debt capital head. He used the example of the high-yield market for the yuan.

“It’s closed now as a result of the yuan devaluation. Comparatively, there is still a pipeline of issuance in Malaysia. It’s just that investors have expectations of a premium for the yields.”

The debt capital head pointed out that demand for corporate bonds was still strong, as a recent exercise saw the issuer pricing its long-term notes at the higher end of the band.

However, Bloomberg reported yesterday that Malaysian companies were putting sukuk sale plans on hold due to an unclear outlook for yields amid a looming US interest rate increase.

The number of syariah-compliant bond deals completed so far in 2015 has fallen to 149, the least since 2011 and down from 177 a year earlier, data compiled by Bloomberg showed.

Issuance has slumped 27% to a five-year low of RM30.1bil (US$7.3bil).

The Bloomberg report said RHB Investment Bank Bhd and AmInvestment Bhd sukuk offerings will fall short of last year’s RM65.1bil, the second-best on record, as a 15% plunge in the ringgit in 2015 and a collapse in oil prices have made it hard to gauge the earnings outlook.