Wait-and-see approach to the bond market


Bond Pricing Agency Malaysia (BPAM) CEO Meor Amri Meor Ayob.

PETALING JAYA: Foreign investors are adopting a “wait-and-see” attitude before buying into Malaysian bonds after a massive sell-off amounting to RM3.6bil in July.

Analysts, however, are upbeat that foreign investors would increase their holdings on the nation’s bonds when a clearer picture of the political situation emerges and a plus point would be a stronger economy in the fourth quarter.

As for now, all eyes will be on the new Prime Minister Datuk Seri Ismail Sabri Yaakob’s policies and the necessary economic reforms he undertakes, as well as how the Covid-19 situation is handled amid the rising cases. Ismail Sabri was sworn in as the ninth Prime Minister on Saturday.

RAM Rating Services Bhd senior economist Woon Khai Jhek (pic below) told StarBiz that persistently high Covid-19 cases that resulted in national lockdowns have been one of the factors behind the waning foreign investor interest in the bond market over the past few months.

RAM Rating Services senior economist Woon Khai JhekRAM Rating Services senior economist Woon Khai Jhek

The other factors are the political uncertainty as well as the re-positioning of investor portfolios towards the United States to capitalise on the rising prospects of faster than expected interest rate normalisation.

Foreign investors in the bond market turned net sellers in June, ending a record breaking 13-month net inflow streak sustained since May 2020. The sell-off amounted to RM497.1 mil in June before accelerating to RM3.6bil in July, as the latter was compounded by a sharp rise in political uncertainties.

In August, the political uncertainties continued to weigh on sentiment. The sharp uptrend in Malaysian government securities (MGS) yields since the start of August indicated that foreign selling pressure was likely to have persisted. Investors would likely stay on the sidelines until these uncertainties clear.

“For the rest of the year, the upside to foreign inflows is supported by the more tangible path to economic recovery in the fourth quarter and 2022. With the pace of vaccinations rapidly picking up, we believe more businesses will reopen by then.

“In addition, the generous yield differentials favouring MGS and government investment issues (GII) should attract some foreign investors. The yield spread of MGS over US treasuries (UST) has widened substantially over the past few months, averaging around 195 basis points (bps) in August (January average: 155 bps). This represented its highest level since October last year,” Woon noted.

The downside risk he said on the mid-horizon is the quantitative easing (QE) tapering and the ensuing policy rate normalisation of central banks in developed markets. QE refers to the buying of longer-term bonds or securities by the Federal Reserve (Fed) to increase money supply and spur lending and investment.

By the Fed cutting back or tapering on its bond buying, it can result in higher treasury yields in the US, hence luring foreign investors in emerging markets, including Malaysia, to seek higher yields or returns in the US. Bond prices and yields are inversely related.

On the political front, Malaysian Rating Corp Bhd (MARC) chief economist Firdaos Rosli (pic below) said it was unclear whether the new Cabinet line-up would mirror the previous one and pursue existing pandemic mitigation strategies.

Malaysian Rating Corp Bhd chief economist Firdaos Rosli.Malaysian Rating Corp Bhd chief economist Firdaos Rosli.

Foreign investors would like to see how differently the new government’s pandemic response would be in their risk assessment, he said.

Also, he said a predictable policymaking space, irrespective of the government of the day, played a role in ensuring the containment of the pandemic.

“Success in curbing the rise of Covid-19 cases and the reopening of economic sectors may reignite foreign investors’ appetite for Malaysia’s capital markets. There has to be a more sustainable way to address lockdowns,” Firdaos said.

Bond Pricing Agency Malaysia (BPAM) CEO Meor Amri Meor Ayob said there was a possibility of net foreign outflows for the remainder of the year if the current pandemic situation remained gloomy.

“Foreign inflows would be impacted if the coronavirus infection is not curtailed soon. International credit rating agencies had already lowered their growth forecast for the Malaysian economy.

“Moreover, the Fed may start to taper its bond purchases by the end of this year as indicated in its latest monetary policy meeting minutes. This could dampen the foreign inflows into the domestic bond market.”

On the demand for bonds, Meor said the demand would be in the short to medium-dated bonds at this juncture, but would switch over to long-dated bonds once the “cloud” hanging overhead is gone.

As to whether the rating agency was revising its projection for issuance of MGS and corporate bonds this year, Firdaos said it was not.

“We are maintaining our projections for gross issuance of MGS/GII and corporate bonds for 2021. For 2021, we projected that gross issuance of MGS/GII to be between RM170bil and RM180bil.

“Our projection takes into account the upside risk to the budget deficit, the rollout of stimulus packages like Pemerkasa, Pemerkasa Plus, and the National People’s Well-Being and Economic Recovery Package, as well as proceeds from the US dollar sustainability sukuk and the withdrawal from the National Trust Fund.

“Meanwhile, we foresee gross issuance of corporate bonds to be between RM100bil and RM110bil,” he said.

RAM’s Woon is maintaining his projection for MGS/GII at RM155bil-RM165bil for now (2020: RM151.9 bil), although it is likely to end the year closer to the upper end of the rating agency’s estimated range amid the slew of government stimulus measures to tackle the pandemic.

There is also upside bias from the possibility of further funding for additional Covid-19 related spending for the rest of this year.

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