MGS yields seen remaining at low levels

MARC chief economist Nor Zahidi Alias and his team are expecting global policymakers to maintain their dovish stance in the current challenging economic climate, boosting the appeal of MGS to foreign investors seeking higher yield returns.

PETALING JAYA: Malaysian Government Securities (MGS) yields are expected to remain at current low levels for the remainder of the year compared with last year.

This would be underpinned by yield-hunting activities amid the low global interest rate environment and subdued inflation outlook, according to Malaysian Rating Corp Bhd (MARC).

MARC chief economist Nor Zahidi Alias and his team are expecting global policymakers to maintain their dovish stance in the current challenging economic climate, boosting the appeal of MGS to foreign investors seeking higher yield returns.

Year-to-date (YTD), the 10-year MGS has the highest real yield compared to its regional peers in Asean. Yields on MGS ended in the first half of this year (1H20) significantly lower compared to last year in a bull-steepening move.

MGS yields had initially peaked in March (2020) as global risk sentiment worsened due to the Covid-19 pandemic. The upward pressure on yields began to ease in the second quarter (2Q20) amid Bank Negara’s aggressive overnight policy rate (OPR) cuts and liquidity enhancement measures.

Bank Negara, at its latest policy meet, had slashed the benchmark interest rate to an all-time-low of 1.75% since 2004, a clear signal of the need to reinvigorate consumption and investments. The OPR was cut by 25 basis points (bps) from 2% earlier, marking it the fourth round of cuts this year.

By end-1H2020, MGS yields were broadly lower by 13bps to 91bps with the three-year note settling at 2.25% (2019: 3.01%).

Meanwhile, yield on the 10-year MGS dipped by 44 bps to 2.87% (2019: 3.31%).

While there are fears of a second wave of the pandemic and a deterioration in global trade relations, which may sap foreign demand for MGS, the rating agency does not foresee any potential significant yield spikes in MGS for the second half of 2020 (2H20).

Supportive fiscal and monetary policies employed would continue to encourage local holdings as witnessed in the first half of 2020 (1H20). Combined with the recent 25 bps cut in the OPR to 1.75% on July 7, these domestic factors would keep a lid on yields, it noted. Notwithstanding this,

MARC foresees a slim possibility of further OPR cuts in 2020. For 2H2020, we envisage the 10-year MGS yield to hover in the range of 2.60% to 2.85%.

According to some bond analysts, including AmBank Group chief economist Anthony Dass, who is also member of the economic action council secretariat, the key risk to government bonds would be FTSE Russell’s annual review in September.

Currently, Malaysia remains under FTSE’s watch list for potential exclusion in the World Government Bond Index (WGBI). However, Bank Negara’s measure to improve the onshore bond liquidity should provide positive impetus, Dass said.

In April last year, FTSE Russell said it would review the Malaysian government bonds’ participation in the WGBI due to market liquidity issues.

Bank Islam chief economist Mohd Afzanizam Abdul Rashid told StarBiz he is projecting gross issuance of MGS and GII at about RM150bil due to the budget gap as well as the need to refinance the maturing securities. He expected bond yields to remain low and the yields would correspondingly move in tandem with the OPR.

In the primary market, MARC expects the gross issuance of MGS/Government Investment Issues (GII) to be between RM155.0bil and RM165.0bil by end-2020.

Meanwhile, analysts and economists told StarBiz that they expect corporate bond issuance to remain sluggish until year-end, with issuance of between RM80bil and RM95bil this year compared with RM132bil last year.

They attributed this to the anticipation of a contraction in the economy which would see lower financing and investments, resulting in lower corporate bond issuance.

Bond analysts agree that the corporate bond issuance would improve moderately in the second half of the year and would depend on the economic recovery and the rolling out of government large infra projects like the LRT3, MRT2, East Coast Rail Link and national fiberisation etc.

After a tepid last two months, RAM Ratings said foreign buyers returned to the Malaysian bond market in June, mopping up RM11.6bil in domestic bond securities, resulting in the biggest monthly net foreign inflow since March 2016.

The return of foreign interest reflects declining risk aversion towards emerging markets due to stabilising oil prices and a resumption in economic activities as lockdowns ease in this region. Increased global liquidity amid central banks’ quantitative easing measures may have also encouraged more foreign inflows, it noted.

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