Local bond market seen picking up

Malaysian Rating Corp Bhd associate director of research and chief economist Nor Zahidi Alias said the government should not pull the brakes on development expenditure.

PETALING JAYA: Momentum is seen picking up in the Malaysian bond market after two consecutive months of foreign net outflows, while the local currency may face renewed pressure.

The catalyst spurring the debt market will be local funds buying into the bond market amid rising external uncertainties and geopolitical risk.

Bond prices are expected to head north and yields sliding, underpinned by local institutional support despite foreign outflows in April and May.

Bond yields and prices have an inverse relationship. Economists and bond analysts concurred with the rising external headwinds from the ongoing US-Sino trade dispute, the dovish stance adopted by global central banks and the geopolitical risk arising from the tensions between the US and Iran which may see investors opting for safe havens like bonds.

AmBank Group chief economist Anthony Dass told StarBiz that in spite of weaker foreign demand, the yields of government and corporate bonds are being supported by strong domestic institutional support.

This is also due to Bank Negara’s pre-emptive 25-basis-point (bps) cut in the overnight policy rate (OPR) in May amid rising concerns about the effects of the destabilising trade war on Malaysia’s growth trajectory, he said.

The 10-year Malaysian Government Securities (MGS) yields fell from 4.07% at end-January to 3.79% at end-May, while the corporate bond indicative yields fell from 4.70% in January to 4.32% in May. “Increasing perception of another 25bps rate cut in the fourth quarter by the central bank is gradually gaining momentum, though the probability is low at only 30%,” Dass noted.

The 10-year Malaysian bond yields were hovering at 3.65% at press time.

He believes bond yields would remain attractive, as Malaysia’s economic growth is expected to outpace those of its A-rated peers.

Though the bank’s ‘base case’ projection for the 10-year MGS yields points to 3.70% - 3.75% for 2019, he said there is risk of it rising to 3.90% – 4.00% if external headwinds continue to remain loud and adverse domestic noise gains momentum.

“Foreign holdings in MGS reported a net outflow of RM2.8bil up to end May with three out of the five months sitting in a net outflow position. Besides, the KLCI has been in a net foreign outflow since the start of the year, now facing a RM4.9bil outflow until end May.

“So, the current slide in the 10-year MGS yields which is sitting on our ‘best case’ scenario of 3.60% - 3.65% may not last, especially if foreign investors decide to further rationalise their bond holdings in our market should the risk-off sentiment picks up,” he said.

Meanwhile, the 10-year AAA indicative yield spread narrowed since March from 74.5bps to 61.6bps in May against the 10-year MGS yield due to the mismatch between supply and demand.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said MGS yields are likely to trend downwards to their pre-US President Trump era levels of 2016.

“In view of this, we now foresee the 10-year MGS yield to be in the range of 3.5% to 4.0% for the rest of 2019,” he added.

“The 10-year MGS yield had been hovering above 3.6% (at the time of writing), dropping from its peak of 3.94% in April. This is due to concerns over the FTSE Russell and Norwegian Sovereign Wealth Fund fiasco, the move to cut the OPR by 25bps to 3.00%, and the dovish tone adopted by global central banks amid weaker prospects of the global economy.”

Despite these headwinds, Zahidi feels the ringgit would be somewhat supported by rising crude oil prices amid increasing US-Iran political tension.

The expectation of an interest rate cut in the US would also help support the ringgit, as the greenback softens against major currencies.

“Notwithstanding this, concerns over a prolonged US-China trade war and the weaker prospects of global trade in the near term could limit the upside of the ringgit at this juncture,” he said.

Socio-Economic Research Centre executive director Lee Heng Guie said the local currency had succumbed to downward pressures against the US dollar in late May and early June due to a confluence of negative sentiments. While the ringgit would continue to be subjected to external pressure in times of increasing uncertainty, he believes that Malaysia’s economic and financial fundamentals should remain supportive of the currency over the medium term.