KUALA LUMPUR: RAM Ratings expects foreign buying of Malaysian government securities (MGS) is likely to remain dull for the rest of June after a brief respite in May due to concerns about a wider fiscal deficit and debt levels.
It said on Monday foreign interest returned to the Malaysian bond market in May after three consecutive months of net outflows (totalling RM22.4 bil), supported by a more upbeat global sentiment.
However, this skidded to an abrupt halt in early June amid heightened concerns over the escalating Covid-19 outbreak in the US and the consequent impact on the global economy.
“Further, the recent launch of the new PENJANA stimulus package totalling RM35 bil by the Malaysian government raised investors’ concerns about the wider fiscal deficit and debt levels, ” it said.
RAM said these concerns pushed up the 10-year MGS yield by 25.5 bps to a peak of 3.12% on June 9, before swiftly retreating below 3%.
“Since then, this benchmark yield has stayed above the level seen throughout May (average yield: 2.89%), on account of persistent foreign investor risk aversion, ” it said.
Over the longer term, all-time low global interest rates amid liquidity-boosting measures by central banks would continue to suppress domestic bond yields.
RAM pointed out that on June 10, the Federal Open Market Committee, the US Federal Reserve indicated that the benchmark short-term interest rate (i.e. the Federal Funds Rate) will remain near zero through 2022.
It also said similarly, expectations of further Overnight Policy Rate cuts by Bank Negara in the second half would also keep a lid on domestic bond yields.
The PENJANA stimulus package, launched in June, is expected to widen Malaysia’s fiscal deficit to 5.8%-6.0% of GDP (from RAM’s previous projection of 4.8%).
“Given the government’s intention to fund this deficit domestically, RAM has revised its MGS/GII issuance to between RM155bil and RM165bil for 2020, from the previous RM135bil to RM145bil, ” RAM said.
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