Easing trade tension reignites foreign demand for local bonds

  • Markets
  • Wednesday, 15 Jan 2020

Malaysian Rating Corp (MARC) said the significant decline in US-China trade tensions was the main stimulant for the local bond market in December 2019.

KUALA LUMPUR: The local bond market ended 2019 on a positive footing compared to the preceding year with Malaysian Government Securities (MGS) yields falling to multi-year lows while foreign holdings of local bonds climbed to the highest level since 2012.

Malaysian Rating Corp (MARC) said the significant decline in US-China trade tensions was the main stimulant for the local bond market in December 2019.

During the month, the upbeat sentiment was spurred by the US and China, which agreed on details of the first phase of a trade deal between the two countries, it said.

The move will see the US reducing tariffs on some of China’s imports and China, in return, agreed to increase their purchases of US agricultural goods.

China also announced that it will cut tariffs on certain US imports ranging from food to high-tech products.

MARC pointed out that by end-December, MGS yields were broadly lower by one basis point to 12 basis points (bps), settling at their multi-year lows.

“The decline in yields was more pronounced along the 10-year and 15-year sectors, flattening the yield curve, with the 10-year/three-year MGS yield spread narrowing to 30 bps month-on-month (m-o-m).

“The three-year MGS shed three bps from November to 3.01%, the lowest since October 2016, while the 10-year MGS shed 12 bps to 3.31% from 3.43% in the preceding month, the lowest since January 2009, ” it said.

MARC noted that corporate bond credit spreads were at an all-time low as the decline in yields was more pronounced in local govvies.

As at end-December, the five year blended credit yield spread (AAA, AA and A-rated) stood at 157 bps, the lowest level seen since 2005. Yields on AAA and AA-rated corporate bonds were broadly lower by 1bp to 5bps m-o-m.

Meanwhile, yields for A-rated corporate bonds, especially along the five-year/15-year curve, fell more sharply by two bps to 10 bps m-o-m with its yield curve flattening at end-December.

In December 2019, foreign investors increased their holdings of local bonds by RM8.1bil m-o-m to RM204.7bil, the highest since April 2018.

Strong foreign demand for MGS was the main contributor that led to the RM5.5bil in net foreign inflows during the month. This pushed the total foreign holdings of MGS to RM163.9bil.

The resurgence in foreign demand for local bonds brought the total net foreign inflow into local bonds for 2019 to RM19.9bil, the highest level since 2012, a stark contrast from a net foreign outflow of RM21.9bil in 2018

This led to an increase in foreign ownership of local bonds to 13.7% from 13.1% in 2018. By instrument, MGS/GII papers registered a combined net foreign inflow of RM22.9bil in the whole of 2019 compared with net foreign outflow of RM20.9bil in 2018.

However, short-term government papers and corporate bonds registered net foreign outflows of RM2.2bil and RM900mil.

“In the issuance space, total gross issuance of long-term corporate bonds surged by 27% to RM132bil in 2019 from RM103.9bil in 2018, the highest amount ever recorded.

“Similar to the previous year, the dominant sectors that led the issuances were financial services, property & real estate and infrastructure and utilities.

“Robust issuance activities in 2019 were supported by the significantly lower yield environment that encouraged issuers to rush for financing, ” it said.

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