Foreign interest in bond market still intact

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PETALING JAYA: Political development in the country will be on the radar of foreign investors who have been net buyers of Malaysian bonds.

Fixed income analysts told StarBiz that besides the macroeconomic fundamentals, foreign funds would be closely monitoring the political scenario and how it pans out going forward.

“Even with the swearing in of the eighth prime minister, foreign investors will still be keeping a close eye on government policies and the capital market developments here. Political stability is key for investors. Any negative news flows may cause foreign investors to exit from the debt market, resulting in a sharp spike in bond yields.”

As of now, analysts and economists agree the political scenario is not expected to steer any significant outflows underpinned by attractive yields, prospective interest rate cut and ample liquidity to absorb any outflows.

For three consecutive months (November 2019 to January 2020), the local bond market has witnessed net foreign inflows. Foreign participation in the Malaysian bond market heightened considerably last year, with an impressive net foreign inflow of RM19.9bil – the largest inflow since 2012.

Total foreign holdings of local bonds for January was at 13.8% (December: 13.7%) of total outstanding bonds. Malaysian government securities (MGS) accounted for most of the net foreign inflows in January. Foreign holdings of MGS share of total outstanding stood at 41.7% in January (December: 41.6%).

As at press time, the 10-year government bond yield was hovering at 2.84%, down by about 0.7%. It reached a maximum yield of 4.45% (Nov 29,2016). Bond yields and prices have an inverse relationship.

OCBC Bank (M) Bhd head of global treasury Stantley TanOCBC Bank (M) Bhd head of global treasury Stantley Tan

Global research firm Fitch Solutions recently said it would revisit its long-term outlook for the Malaysian economy over the coming weeks as the political instability was shaping up to be more than just a temporary issue following the 2018 general election.

It noted that the downside risks to Malaysia’s long-term growth prospects are rising due to political uncertainty and increasing polarisation.

Accordingly, it revised downwards the country’s Short Term Political Risk Score to 69.8 (out of 100) from 72.5 previously, to reflect the risks to social stability, policymaking and policy continuity.

Malaysia, meanwhile, has revised its gross domestic product (GDP) growth to be in the range of 3.2% to 4.2% for 2020 due to the global economic scenario and Covid-19 impact.

OCBC Bank (M) Bhd head of global treasury Stantley Tan told StarBiz that barring any drastic political instability, the bank believes foreign investor comfort levels on Malaysia would remain strong.

“The decline in interest rates and bond yields globally, coupled with Malaysia’s continued current and trade account surplus along with stable investment grade rating, will continue to make ringgit bonds resonate with foreign investors as more and more sovereign and corporate debt globally enter zero and negative yield zones.

“We are confident recent efforts and progressive measures undertaken by Bank Negara, namely the foreign exchange policy, will be noticed and well received by global investors, ” he said.

Bond Pricing Agency CEO Meor Amri Meor AyobBond Pricing Agency CEO Meor Amri Meor Ayob

Tan said the recent increase in Government investment issue (GII) holdings by foreign investors points possibly to new investor wallets and a widening of their investment mandates.

As things stand, Maybank Kim Eng head of fixed income research Winson Phoon said the recent political development is not expected to affect the macro-stability of Malaysia.

The foreign holdings in ringgit bonds, he said, are majority held by the more sticky type of investors like central banks/sovereign wealth funds and pension funds. He said these investors would likely take a long-term view on Malaysia.

He said Malaysia’s 10-year MGS yields were more attractive compared with the US (10-year government bond yield) as well as that of Singapore, Thailand, South Korea, and China government bond yields.

Phoon said even if there is outflow, Malaysia has a deep pool of local liquidity to absorb the outflow.

On the projection of yield, he said: “We are revising down our 10-year MGS yield forecast to 2.75% by year-end.”

“This is due to the downside risk to growth amid rising fear of the escalation of Covid-19 into a pandemic, which may risk triggering a major global downturn, considering we are at the late cycle and the global economy was already reeling from the trade-war impact, ” he noted.

Bond Pricing Agency Malaysia (BPAM) CEO Meor Amri Meor Ayob said as far as foreign investors are concerned, the current political uncertainty do not bode well for the Malaysian economy, especially as the global economy begins to weaken in light of the recent Covid-19 outbreak.

“There will be some short-lived foreign outflows but we do not think it will be massive as Malaysia is still one of the few countries that offer relatively higher yields amidst the current low interest rate environment globally.

“Moreover, local institutional players are expected to pick up the slack as Bank Negara is widely tipped to reduce the benchmark interest rate in the upcoming monetary policy meeting. This will offset any negative impact from the foreign outflows, ” Meor noted.

Maybank Kim Eng head of fixed income research Winson PhoonMaybank Kim Eng head of fixed income research Winson Phoon

AmBank Group chief economist Anthony Dass is forecasting the 10-year MGS at 2.95%-3.15% for 2020 or to hover between 5 and 15 basis points.

Currently, he said appetite for Malaysian debt remains favourable, adding that this was supported by attractive valuation and expectations for a cut in overnight policy rate (OPR). Furthermore, he said the risk of downgrading Malaysia by FTSE Russell in the World Government Bond Index during its next half-yearly review in March 2020 was relatively low.

With a modest increase in government financing needs of about RM53.7bil, Dass expected the gross issuance of government bonds this year to be around RM125bil, with no issuance of bonds needed.

He expected the appetite from the market on the sovereign ringgit bonds to remain resilient with bid-to-cover ratio of 2-3 times as investors continue to see relatively attractive valuation in ringgit paper compared with the regional market.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said bonds would typically be in high demand as investors seek shelter against volatility in the risky assets such as equities.

He said heightened concerns on the Covid-19 outbreak would mean that Malaysia’s economic growth trajectory would be affected. He added that there is a possibility that the economy would operate below its potential level which necessitates rate cuts by the central bank. “We foresee OPR cuts could happen in the first half of this year, ” he added.

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