‘FED MOVE MAY AFFECT BOND MARKET’
Volatility remains as investors await US central bank decision to trim portfolio
THE Malaysian bond market will continue to be volatile as investors await the United States Federal Reserve’s (Fed) next step in reducing its own bond holding, which stood at US$4.5 trillion (RM19.3 trillion) as of the first half of the year.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid is of the opinion that the Fed’s decision to trim its balance sheet could have an immediate implication on the movement of US Treasury bonds as yields could experience an upward bias.
“This, in turn, could affect the Malaysian Government Securities (MGS) yields, given the close correlation with the US Treasury bonds,” he told NST Business recently.
He said the move expected at the Federal Open Market Committee (FOMC) meeting next month had the local players speculating that Bank Negara Malaysia would also be hiking the Overnight Policy Rate in a reactionary manner.
“I would, however, give more weight to the interest rate outlook in the US, as rate differentials are key determinants to fund flows.”
Afzanizam stressed that in a rising interest rate environment, investors should look into short duration bonds in order to minimise the risks.
The US$4.5 trillion portfolio held by the Fed is mostly made up of government debt accumulated in the years after the 2007-2009 financial crisis.
It has initially used its balance sheet to keep interest rates low and the economy moving. By buying up bonds, the Fed provided demand that held government yields back.
By also keeping the balance sheet large, it helped prevent a flood of bonds into the market that might have driven yields higher and pushed up borrowing costs.
Once the shedding of bonds was set in motion, the process would not be altered unless there was a “material deterioration” in economic conditions, said the FOMC minutes.
Debt rating agency Malaysian Rating Corp Bhd (MARC) expects upticks in the bond market, as prospects of a Fed rate hike remains likely with the recovery of the US economy.
This is also despite the Malaysian bond yields drifting lower in the first half of the year.
MARC earlier this month revised total bond issuance projection for this year to between RM90 billion and RM100 billion, from the previous projection of between RM75 billion and RM85 billion.
“Our new projection is based on the rising trend of issuances in unrated government-guaranteed bonds and unrated corporate bonds segments in the first half of this year,” it said in its bond market outlook.
MARC said the issuances in both segments had risen by 43.8 and 123.7 per cent, respectively, in the first half of this year from the corresponding period last year.