PETALING JAYA: More overnight policy rate (OPR) cuts on the horizon and the move to allow banks to use Malaysian government securities (MGS) and government investment issues (GII) to meet the statutory reserve requirement (SRR) ratio will help spur bond demand this year.
Economists and bond analysts also agree that Bank Negara may step up its buying of government bonds, if the need arises. This bodes well for the bond market amid economic uncertainties as a result of the Covid-19 pandemic.
On May 5, the OPR was slashed by 50 basis points (bps) to 2.00%, the lowest since the global financial crisis. It was the third consecutive rate cut following two 25bps rate cuts in January and March.
Furthermore, the central bank also said that MGS and GII could be used by banks to fully meet the SRR compliance effective May 16.
SRR is non-interest bearing balances that commercial banks are required to keep with the central bank. It is also an instrument to manage liquidity.
Previously, Bank Negara only allowed principal dealers to recognise both MGS and GII of up to RM1bil. The measure to allow MGS and GII to meet SRR ratio is expected to release about RM16bil worth of liquidity into Malaysia’s banking system.
OCBC Bank (M) Bhd head of global treasury Stantley Tan (pic below) told StarBiz the bond market is expected to be well supported for the rest of this year, underpinned by lower interest rates, with the possibility of a 0.25% OPR cut in July or September.
He said the central bank may follow the path of Bank Indonesia and Bank of Thailand to increase holding of government bonds, albeit at a much more gradual and measured pace.
On bond yields, he said: “Based on our internal risk framework for supply and demands as well as foreign flows, of which we are sanguine given the low foreign ownership now, bond yields are likely to edge gradually lower this year, with the projected 3-year MGS at 2.20 - 2.25%, 5-year at 2.40 - 2.45%, 7-year at 2.55 - 2.60% and 10-year at 2.70 - 2.75%.”
AmBank Group chief economist Anthony Dass said for the remaining of 2020, he expects the bond market to remain stable.
“Despite additional government financing requirements, we still view that there is room for the yields to track lower than current levels.
“The demand for local bonds will be supported by the central banks’ further relaxation of its SRR compliance, by allowing both banks and principal dealers to use MGS and GII to fully meet the SRR ratio which is kept unchanged at 2.00%.
“This measure is estimated to release RM16bil of liquidity into the banking system. There is also potential room for an OPR cut this year. Hence, the direction of interest rate will remain downward bias and could stay lower for a longer period.
“Besides, the additional impetus to the bond market may arise if Bank Negara feel the need to buy more MGS/GII.
As at May 15, the central bank has purchased RM10bil of government bonds, the highest ever holding of such bonds, ” he noted.
However, Dass said the risk to the local bond market at this juncture would be mainly on the upcoming FTSE Russell review in September, as well as domestic challenges.
Recall that in April last year, FTSE Russell said it would review the Malaysian government bonds’ participation in the World Government Bond Index (WGBI) due to market liquidity issues. Continued discussions between Bank Negara and FTSE Russell are ongoing to avert the exclusion.
Meanwhile, RAM ratings group economist Kristina Fong (pic below) felt a persistent foreign outflow from the bond market would continue to place upward pressure on domestic yields although a repeat of the 56.9bps spike seen in March is highly unlikely.
On the flip side, she said continued loose monetary policies across the globe to cushion the economic fallout might moderate some of this upward pressure. Further OPR cuts this year would also weigh on yield trajectories, she noted.
On the outlook for the bond market this year, Fong said: “Economic uncertainties continue to cloud market prospects and the outlook for bond financing activities this year.
“On top of the concerns on the Covid-19 spread and corresponding lockdown measures, new threats are emerging which run the risk of depressing global growth even further.
“For one, US-China trade relations have soured quite rapidly over the past couple of weeks, with tighter regulations on suppliers to Huawei using US components and proposed stricter regulations on listed Chinese firms on the US stock exchange.
“As a result of this, risk aversion has escalated and flight to safety dynamics are more prevalent.
“Thus, the outlook for capital flows this year are likely to follow a volatile trend, creating greater uncertainties for the market for financing, ” she said.