Malaysian bond market riding the wave


  • Business
  • Monday, 05 Jul 2004

This is the first in a revival of the series by Aseambankers Malaysia Bhd economist and head of fixed income research BALJEET GREWAL on the development of the Malaysian bond market. The monthly series will cover topics such as asset-backed securitisation, Islamic bond market, and structured products as well as other fixed income instruments. This month she examines the impact of the rise in the US Fed fund rate on the local bond market.  

Baljeet Grewal

THE Malaysian debt capital market has demonstrated resilience and the development of ringgit bonds across a range of tenors, credit ratings, issuers and products has created one of the fullest, most diverse bond markets in the region. 

Economic dynamics – i.e. accommodative interest rate environment, a pick-up in domestic economic activity, ample liquidity conditions – as well as the recognition that bonds account for a more stable source of long-term financing have also added to the allure of fixed rate securities. Lately, however, investors have been deliberating the impact of a potentially rising global interest rate environment and robust economic pursuits on the domestic debt market.  

The US Federal Reserve last week boosted its key short-term interest rate by 25 basis points for the first time in four years, ending an extraordinary period of historically low interest rates and beginning a new cycle of rising borrowing costs. A glance at the US economy depicts optimism, as key economic segments appear to be on the cusp of recovery after a prolonged slump. 

Nevertheless, there remains an inconceivable irony tucked deep within the folds of the US recovery story: labour market woes and twin deficits. Unemployment stands at 5.6% (May 2004), and if adjusted for the 4.7 million part-time workers, the real unemployment rate is 8.8%, implying dismal employment growth contrary to economic expansion.  

Add to this a concoction of current account deficits to the tune of US$144bil and trade deficits of US$48.33bil as well as one-off price increases (sending inflation on an upward trajectory), and the result is an economy that is, at best, average. Hence, the “measured” approach to future US interest rate rises and the vigilant stance adopted by the Fed.  

What is the implication of this on bond markets? In the US, supported by relief buying, Treasury yields on two- and 10-year notes narrowed by 14bps and 11bps, respectively, indicating the market sentiment that inflation can be contained. 

On the domestic front, Malaysian Government Securities closed higher (yields narrowing 2–5bps) on the moderate pace of future US interest rate hikes and the unchanged local policy rate. In general, local bond prices have been subdued given the buoyant domestic recovery momentum and upbeat equity market outlook (i.e. in good economic conditions, investors tend to shift out of safer investments into higher risk instruments like stocks). 

Whilst investors continue to remain alert, Malaysian bonds still represent an attractive investment alternative given the competitive prices and returns. In a recovering economy, bonds will benefit from the credit game as companies' cashflows improve. Supporting a firmer economic trend, low domestic rates, excess liquidity (RM120bil) and an improvement in corporate earnings will fuel credit play, namely in shorter tenors and in high yielding papers. Bonds will also continue to feature on the radar screens of investors and remain a relatively constructive investment given: 

·Low domestic interest rates and accommodative monetary policies, capping short-term inflationary pressure, representing an opportune time for corporates to raise funds; 

·Excess liquidity in the system seeking high yield and stable returns; and 

·The advent of more structured debt products, namely asset-backed securities, collateralised debt/bond obligations creating more market depth. 

Overall, expect economists to closely watch for clarity in economic and corporate figures to dictate trends in the debt market, especially with economic momentum picking up. As investors toss the proverbial coin in contemplation between bonds and equities, it remains crucial to balance the resonant domestic macroeconomic fundamentals against global interest rate expectations. As the pace of economic recovery accelerates, the Malaysian debt market is poised to play a crucial role in the overall financial architecture.  

·The information herein has been obtained from sources believed to be reliable but cannot be guaranteed. The views or opinions expressed are subject to change at any time. Neither the information nor any opinion expressed is to be construed as a solicitation for the purchase or sale of any securities. Aseambankers Malaysia Bhd does not assume any responsibility whatsoever in this respect.  


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