Demand for Malaysian bonds stay healthy


PETALING JAYA: The healthy demand for long-dated Malaysian bonds is expected to prevail despite the anticipation of weaker foreign fund inflows into the local market this year as the Federal Reserve (Fed) looks to raise interest rates due to strong inflationary pressure.

Maybank Investment Banking Group head of fixed-income research Winson Phoon told StarBiz he expects healthy demand for long-dated Malaysian Government Securities (MGS) and corporate bonds for this year amid the upcoming Fed rate hikes.

“Although investors are cautious against extending duration in a rising bond yield environment, we expect healthy demand for long-dated MGS and corporate bonds from pension funds and life insurance companies.

“Meanwhile, there also appears to be demand for the shorter or mid-tenure government bonds. For example, the five-year MGS auction in January received a strong bid-to-cover ratio of 2.3 times.

“We are, therefore, neutral on the bond yield curve,” he said. The bid-to-cover ratio denotes the demand for bonds. The higher the ratio, the stronger the demand for the particular bond.

While inflation risks remain, Phoon said he is neutral on the MGS for a number of reasons. This is because a number of interest rate hikes have been priced into the rates curves.

Maybank Investment Banking Group head of fixed Income research Winson PhoonMaybank Investment Banking Group head of fixed Income research Winson Phoon

For example, he said the US rates market has priced in a total of four hikes in 2022, while the ringgit rates curve has priced in two hikes by Bank Negara for this year.

Phoon is forecasting the three and 10-year MGS to hover at 2.95% and 3.65%, respectively, for this year.

On the tenure of bond holdings, RAM Rating Services Bhd economist Nadia Mazlan said that in the near term, short-term investors could prefer short-dated bonds as they try to avoid duration risk amid the expectations of higher interest rates.

“However, we expect the anticipated interest rate hike to have already been priced in to long-term yields, so the demand for long-dated bonds should still see healthy take-up, especially among institutional investors with long-duration liabilities that they need to match.”

Phoon said the higher Fed rates anticipated this year may exert pressure on ringgit bonds, notably leading to higher MGS and corporate bond yields. Bond yields or borrowing costs have an inverse relationship.

The higher the yields, the lower the price of the bond, denoting weaker demand for the asset class.

“In fact the selloffs in global bonds have already started last year, with MGS yields up close to 70 to 100 basis points (bps), except for the 30-year MGS yields, and selling has continued into 2022.

“The higher Fed rates will impact the ringgit bond market as foreign investors seek higher returns in the US market. But despite this, we expect MGS to outperform US Treasuries (UST), with the narrowing of 10-year MGS versus the 10-year UST spread to about 175 bps or narrower,” Phoon noted.

RAM’s Nadia said MGS yields, especially on the longer end of the curve, are likely to continue on an uptrend in 2022 as key global central banks prepare to commence on interest rate normalisation. (see chart).

RAM Rating Services Bhd economist Nadia MazlanRAM Rating Services Bhd economist Nadia Mazlan

She said MGS yields for the seven-year and above tenure have recovered above pre-pandemic levels as of end-2021, reflecting the shift in interest rate expectations amid ongoing global economic recovery.

Yields on the shorter end of the curve are also expected to trend higher amid expectations that Bank Negara would raise the overnight policy rate by 25 bps this year, she said.

“Corporate bond yields should see similar trends as well, as they are typically benchmarked against MGS yields,” Nadia said.

Meanwhile, HSBC head of global emerging market rates research, Andre de Silva, is bullish of the local bond market.

“The main themes surrounding Malaysian bonds in 2022 are likely to be stronger economic growth, the start of a rate hike cycle, normalisation in pension fund contributions and potential elections.

“Malaysia allowed pension fund members to withdraw their savings during the pandemic as a way to boost household income.

“Our base-case assumption is for a normalisation in pension contributions in 2022, thereby triggering a renewed flattening at the long-end of Malaysia’s government bond yield curve as pension fund demands returns for long-dated government bonds,” he added.

Andre de Silva, head of global emerging market rates research for HSBCAndre de Silva, head of global emerging market rates research for HSBC

Foreign bond flows last year saw a meaningful return to the tune of US$7.7bil (RM32.3bil) for total Malaysian government debt purchases in 2021 versus US$4.6bil (RM19.3bil) in 2020, de Silva said.

This is a reflection of improving liquidity and access to forex hedging channels as well as a more stable policy outlook in 2021 versus other regions.

He said the repricing of the central bank’s rate hikes in 2022 and normalisation in pension fund contributions is likely to lead to further flattening in the government bond yield curve.

Nadia, however, believes foreign fund inflows are likely to be weaker this year than in 2021.

This is in view of the scaleback in global liquidity conditions as Fed bond purchases end while investors also reposition funds back to developed markets in response to interest rate hikes, she said.

She said that over the medium to long term, foreign investor interest would still be supported by the attractive yield spread of MGS securities against developed market bonds.

Phoon said foreign bond flows are expected to turn choppy this year and slower from 2021 on narrowing yield differentials between ringgit bonds and UST.

“However, the foreign holdings of ringgit bonds consist largely of real money, which tends to be more sticky, reducing the risk of any disruptive outflow in the event of a broad reversal of fund flows from emerging market debt markets,” he added.

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