Maybank Kim Eng head of fixed income research Winson Phoon
PETALING JAYA: The risk-reward of the Malaysian Government Securities (MGS) is getting less attractive and as such Maybank Kim Eng has lowered its outlook to mildly bearish.
Its head of fixed income research Winson Phoon, who is maintaining his gross MGS and Government Investment Issues (GII) supply forecast at RM115bil in 2019, said he is projecting the 10-year MGS yield at 3.90% by year-end.
"We think the overnight policy rate (OPR) in May was a preemptive move, hence the bar for a second cut this year is higher. The 10-year MGS yield did, but rarely falls below 3.50%.
"While supply technical could remain supportive, we think risk-reward is turning less favourable. With risk events ahead, such as the FTSE Russell
decision and highly uncertain outcome from the US-China rivalry, we prefer to take a non-consensus view by lowering our MGS outlook to mildly bearish," he noted.
Recall that In April, FTSE Russell said it would review the nation’s government bonds’ participation in the World Government Bond Index (WGBI) citing concern about market liquidity. It placed Malaysia on its fixed-income watch list for six months until September.
MGS curve has not been significantly weighed by the risk of exclusion despite some foreign outflows in April and May.
"We assign a 55% probability for Malaysia to be kept at WGBI, indicating that the risk of exclusion cannot be underestimated. The exclusion, if happens, is unlikely to threaten domestic macro-stability, but may still exert some pressure on MGS curve.
"We estimate an additional RM15-RM20bil of outflow risk, largely from passive funds. We think lower foreign participation in MGS will accelerate GII-MGS yield parity, or even negative spreads.
Maybank Kim Eng is maintaining its gross MGS and GII supply forecast at RM115bil this year. The government’s net funding requirement is expected at RM52bil, similar to prior year but net ringgit government bond supply is lower year-on-year because of the foreign currency issuance in Samurai bonds, the research house said.
On private debt securities (PDS), year-to-date, supply totalled about RM49bil, it noted, addding that reinvestment demand is strong because of higher
maturities, but Maybank Kim Eng is taking a sanguine view that issuances may pick up pace in the second half of this year.
Lower yields may encourage some issuers to raise funds to lock in longer term funding, Phoon said.
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