PETALING JAYA: Although most analysts are not revising their bond projections target for next year, many agree that bonds, especially the Malaysian Government Securities (MGS), will come under intense pressure in terms of yields with lower crude prices coupled with the weaker ringgit.
The yield on 10-year MGS had risen to its highest level in 10 months on concern that the weakening ringgit will spur a sell-off by overseas funds.
The local currency at the same time has been one of the worst performers in Asia after declining 3.3% this month. Bond Pricing Agency Malaysia CEO Meor Amri Meor Ayob told StarBiz that as foreign investors were still holding substantial amounts of MGS, any accelerated reduction in foreign holdings in a short period of time would put a lot of pressure on MGS yields.
For instance, he said, as of Dec 16, the 10-year MGS yield had spiked 36 basis points (bps) since Nov 28 while the exchange rate between the US dollar and ringgit had surged to 3.4885 from 3.3825 over the same period. Foreign holdings in MGS stood at about 46% in October,
Judging from the depreciation of the ringgit, Meor opined that offshore investors might have reduced their holdings again in November and December. As of end-October, the foreign holdings in MGS had increased to RM146.7bil from RM137.1bil in December 2013, while the foreign holdings in Government Investment Issues (GII) rose to RM5.3bil from RM3.3bil. Foreign holdings in these segments have eased from the peak seen in the middle of the year.
He said crude oil prices at the moment were still very volatile and susceptible to further downside, adding that on the flip side, this might present bargain-hunting opportunity to investors with the MGS at the current levels.
Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias said the rating agency anticipated MGS yields to trend slightly higher next year due to declining global oil prices and rising inflationary pressure from the implementation of the goods and services tax (GST).
“We expect the impact from GST to push inflation rate up to between 4.0% and 4.5% next year. Based on the historical statistical relationship between inflation rate and MGS yield, an inflation rate of 4.5% is consistent with a 10-year MGS yield of around 4.3%.
“However, we do not rule out the possibility of higher yields if the Fed decides to hike interest rates earlier than expected or if oil price remains significantly low for a considerable period such that it affects the government’s fiscal position,” he said.
MARC is maintaining its earlier forecast for total gross corporate bond issuance of RM80bil-RM90bil in 2015, almost unchanged from an estimated RM82bil issued in 2014.
MARC envisages gross MGS/GII to be between the range of RM85bil and RM95bil in 2015 compared to RM84.5bil in 2014.
RAM Rating Services Bhd is also maintaining its growth projection for next year although there may be some slight deviations. Its CEO Foo Su Yin said private debt securities (PDS) was expected to perform slightly better next year with RM90bil-RM95bil in gross issuances supported by infrastructure development, continued capital augmentation by financial institutions and construction activities. RAM Ratings forecasts gross PDS issuance of between RM85bil and RM90bil this year.
“Although 2015 will have its fair share of challenges, we remain optimistic of the pace of economic growth. Our GDP forecast is 5.3% for next year against 5.8% for this year. Private investment is expected to sustain momentum and the various infrastructure projects would still require long-term funding through the bond market,” Foo said.
As for MGS, gross issuance was expected to reach between RM100bil and RM105bil in 2015, a level similar to this year, she said. Commenting on the immediate and long-term impacts if current headwinds were to persists i.e. lower crude prices etc on the PDS and MGS market, she said if crude oil prices experience a prolonged decline, this could impact growth prospects and could see further widening of the fiscal deficit and also further narrowing of the current account surplus.
Given this weakening of the macroeconomic fundamentals, investor sentiment could be affected and might see further retraction of foreign funds from the domestic bond market, Foo said. However, she noted institutional investors had the capacity to moderate excessive foreign fund pullback of this nature.
OCBC Bank (M) Bhd head of global treasury Ng Seow Pang, who is maintaining MGS bond issuance projections at RM100bil next year, felt foreign holding of MGS should remain relatively stable.
“The main investors are mutual bond funds. They are benchmarked against global indices. As long as Malaysia’s position in the indices remains unchanged, foreign investors will keep a certain weightage of Malaysian bonds in their funds. However, fund managers have the leeway to go overweight or underweight on Malaysia and the lower oil price is perhaps contributing to the underweight position,” he said.