Vo­latil­ity re­mains as in­vestors await US cen­tral bank de­ci­sion to trim port­fo­lio

New Straits Times - - Business / News - AYISY YU­SOF KUALA LUMPUR bt@me­di­aprima.com.my

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.

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