Volatility in equity market will not affect local bonds

  • Business
  • Tuesday, 08 Mar 2011

PETALING JAYA: The demand for bonds may be impacted if there are further hikes in key interest rates and persistent uptrend in global energy prices.

However, the current equity market volatility caused by the political unrest in the Middle East and north Africa is not expected to have any significant impact on the local bond market .

RAM Holdings is maintaining its RM55bil to RM60bil private debt issuance forecast for 2011, according to its economist Jason Fong.

Investors viewed Malaysian bonds favourably with lower cost of financing compared with the equity market.

However, this optimistism would be tempered by the possibility of a persistent hike in global energy prices that might cause global production and demand to slow.

Should this scenario occur, a flight to safety to assets such as the US Treasuries and commodities by foreign funds might adversely affect the domestic bond market, he said.

Any increases in the overnight policy rate may cause activity in the bond market to slow, as the cost of debt financing would increase in tandem.

OCBC Bank (M) Bhd head of investment banking Tan Ai Chin expected bonds to be the asset of choice for global investors since they provided stable income as well as a balanced risk-return profile, especially for higher rated papers.

During the current turmoil, several asset classes might be perceived as high risk and hence, investors might need to reallocate their funds into assets with lower risk-return profiles. “Bonds fit this criterion perfectly,” she said.

Malaysian Rating Corp (MARC) head of fixed income research Wan Murezani Wan Mohamad said the current situation would not send risk aversion to a higher level as seen during the financial crisis.

“We do not expect the political unrest in the Middle East to be a catalyst for a significant rally in the government bond market at the expense of other risky asset classes.

“What we are seeing now is a specific political risk in the Arab nations and it is unlikely to spill over elsewhere,'' Wan Murezani added.

The magnitude of the decline seen in the stock markets thus far has not been as significant as it was during the global financial or debt crisis over the last two years.

He said the factors that would drive the local bond market and its demand would be domestic ones which, among others, included the Economic Transformation Programme and the 10th Malaysia Plan.

Wan Murezani said he expected corporate bond issuances to hit the RM50bil mark in 2011.

For the first two months of 2011, MARC announced two new ratings with a total programme size of RM12bil.

Bond Pricing Agency Malaysia chief executive officer Meor Amri Meor Ayob said that from the local sovereign market perspective, there was no significant increase in the trade volume in recent weeks following the unrest.

The same phenomenon was also being observed in the Malaysian government securities (MGS) yield curve, where there was no significant decrease in yield across-the-board albeit there was a slight decrease of two basis points in the three-year MGS.

He added the local sovereign bond market had its own issuance pipeline based on government initiatives pertaining to several economic projects.

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