Bonds are back

Woon Khai Jhek: The slowdown in monetary policy tightening in the United States should bring some reprieve to the market and help sustain foreign fund inflows into the domestic bond market.

PETALING JAYA: The Malaysian bond market could see more participation by foreign investors as the US Federal Reserve (Fed) gradually relaxing its monetary policy tightening.

The Fed raised its benchmark interest rate by another 25 basis points (bps) on March 22, bringing it to a range of 4.75% to 5%, a more moderate quantum compared to the consecutive 75 bps hikes in 2022.

Economists and fixed-income analysts said the US central bank’s move hinting at a slower rate hike is good news for the local bond market.

This would bolster the demand for Malaysian government bonds – Malaysian Government Securities (MGS) and Government Investment Issues (GII) – subject to the global market conditions, they said.

RAM Rating Services Bhd senior economist and head of economic research Woon Khai Jhek told StarBiz the demand for Malaysian government bonds should improve this year as the Fed has gradually moved away from employing aggressive rate hikes in taming inflationary pressure.

The latter was the primary trigger of the global bond market sell-off and the persistent foreign fund outflow from the Malaysian bond market last year, he said.

While the Fed has reiterated that it remains committed to bringing down inflation, he said it has adopted a more dovish tone in its March Federal Open Market Committee statement while hinting interest rate increases are nearing an end.

“The slowdown in monetary policy tightening in the United States should bring some reprieve to the market and help sustain foreign fund inflows into the domestic bond market.

“The improvement in investor sentiment is observed with the return of foreign inflows over the past few months,” he noted.

Foreign investors remained net purchasers of MGS and GII for the fourth straight month in February, generating an inflow of RM5bil, almost double the RM2.7bil seen in January.

The overall fund inflow surged to RM4.3bil (January: RM498.3mil), despite continued outflows from Malaysian Treasury Bills (MTB) and Malaysian Islamic Treasury Bills (MITB) (RM316mil). MTB and MITB are short-term government securities.

Woon said despite the risk of a temporary blip in foreign outflows triggered by the US banking crisis, he expects foreign investors to return to the local ringgit market for the rest of 2023, barring adverse market events.

Market confidence was roiled by the sudden collapse of Silicon Valley Bank and the subsequent shutdown of Signature Bank and a few other banks at risk in the United States as bond yields fell abruptly in March.

The 10-year US Treasury (UST) yield plunged to 3.39% as of March 17, down 53 bps from end-February. Domestically, the 10-year MGS yield also followed suit, falling 8.3 bps to 3.87% as of March 14 from end-February.

However, the 10-year MGS yield has since recovered to 3.95% on March 22 (end-Feb: 3.95%). The 10-year UST yield also recovered somewhat to 3.48%, although still markedly below the end-February level of 3.92%.

As at press time, the 10-year government bond yield was hovering at 4.023% from its previous close of 3.996%.

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

RAM Ratings’ Woon said global investors would remain circumspect over the next few weeks, until there are clear signs that the contagion has been contained.

Ringgit bond yields may continue to see some volatility over this period, he said, although support from local investors should sustain it.

HSBC head of Asia-Pacific rates strategy Tan Pin Ru expects Malaysia’s bond market to perform better this year relative to 2022, considering that Bank Negara is likely done with its policy rate hike cycle.

She said the Fed is also nearing the peak of its policy cycle, adding that the bond supply outlook is also positive as Malaysia’s government has reduced its fiscal deficit.

“We expect more foreign inflows into emerging markets, including Malaysia, when there is a more distinct downward trend in the US dollar. For now, the local bond market can still count on strong local investors’ demand for bonds,” Tan said.

Maybank Investment Banking Group head of fixed-income research Winson Phoon expects a better year for the ringgit government bonds in terms of return.

He is forecasting 6% to 8% total returns in 2023, up from 1.3% in 2022, on expectation of slower growth, moderating inflation and the overnight policy rate (OPR) nearing peak rate.

Meanwhile, Phoon said he is maintaining a “neutral” stance on foreign flows, unless the global funding and liquidity conditions tighten further.

As for the benchmark 10-year MGS bond yields, he is maintaining it at 3.9% by the end of the first half of this year and 3.5% by year-end.

Woon said as policy rate hikes are likely to continue in 2023, albeit to a more limited extent, domestic bond yields are likely to generally trend upward this year.

The Fed’s latest projection material also points to another 25 bps hike for 2023.

Domestically, he is also expecting at least another 25 bps hike in the OPR in 2023 to bring the policy rate back to the pre-Covid level of 3%.

“However, interest rate expectations are likely to have already been somewhat priced-in by investors. There might also be some market positioning for a potential Fed pivot this year, contrary to the Fed’s current expectation for rate cuts to only occur in 2024.

“Hence, future increases in bond yields in response to policy rate hikes are unlikely to be as steep as seen in 2022. In the short term, however, there could be some volatility in yields amid the current banking crisis,” he said.

On the issuance of corporate bonds, Maybank Investment Bank head of debt capital markets Sarina Dalik said she anticipates the ringgit private debt securities (PDS) supply to remain robust in 2023 at RM110bil, on the back of economic recovery and relatively low interest rate environment.

Maybank Investment Bank (Maybank IB) head of debt capital markets Sarina DalikMaybank Investment Bank (Maybank IB) head of debt capital markets Sarina Dalik

She said capital markets continue to be the choice for corporates to raise capital, given ample liquidity available in the ringgit market, better pricing transparency and the ability to lock in long term to match their assets and cash flows.

“To date, more than RM24bil in PDS has been issued in the market and we expect more to come in the coming months to fund infrastructure development, business growth, mergers and acquisitions opportunities and also to meet any refinancing requirements,” Sarina said.

RAM Ratings expects overall corporate bond issuances to reach RM120bil to RM130bil this year (2022: RM153bil), propelled by private refinancing initiatives, continued infrastructure financing needs and financial institutions’ capital augmentation plans.

For government bonds, the rating agency projects MGS and GII issuance to rise to RM170bil to RM180bil in 2023 (2022: RM171.5bil), taking into account the government’s larger deficit financing requirement as well as the refinancing of debts maturing next year.

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