Investor sentiment in debt market could turn more cautious in H2

PETALING JAYA: Investor sentiment in the debt market could turn more cautious in the second half of this year amid external uncertainties which could spark higher bond yields.

Although bonds yields may creep up, most analysts and economists agree that the spike would be at a moderate pace for now.

The recent slew of companies in the oil and gas (O&G) sector failing to service their debts in a challenging economic environment have created jitters among investors in the O&G debt-market space.

Nam Cheong Group Bhd is the latest company that failed to service its debts due to the prolonged downturn in the O&G industry.

Other companies that are restructuring their debts include Alam Maritim Resources Bhd, Perisai Petroleum Teknologi Bhd and Ezra Holdings Ltd.

UOB Asset Management (M) Bhd CEO Lim Suet Ling told StarBiz that investors are turning more cautious on the local debt market in the second half of this year pressured by rising global rates.

“External uncertainties such as the United States Federal Reserve (US Fed) rate hike, the normalisation of central banks’ balance sheet globally and policy uncertainty from Trump administration could weigh on the local debt market.

“We expect ringgit bond yields to rise mildly and the curve to steepen by the second half pressured by higher US treasury yields and hawkish remarks from European Central Bank and Bank of England, signalling the need for policy normalisation. Nonetheless, the breadth of our domestic investor base and stable overnight policy rate (OPR) should provide some cushion to the market.”

Lim said bond yields for both Malaysian Government Securities (MGS) and corporate bonds are expected to end the year higher but should remain supported as Bank Negara is expected to keep the policy rate unchanged.

“We do expect government bonds to be more volatile than corporate bond given its relatively high foreign ownership.

“Besides that, corporate bonds would be better supported as its higher yield acting as a buffer against higher rates,’’ she said.

CIMB Group head of treasury and markets Chu Kok Wei feels domestic yields are expected to be largely resilient with mild increase in the second half of this year, owing to upward inflationary pressures, global monetary tightening and a possible correction from the recent lows achieved in longer term MGS.

However, he said the weakening of domestic yields would be pared by the US Federal Reserve’s gradual tightening pace which limits potential outflow from emerging markets.

“The steady but controlled domestic growth and inflation may instigate a steepening of the MGS curve. Our projection for 3-year MGS is 3.25-3.5% by the end of 2017 and the end of first quarter of 2018.

“We are also including a corrective movement from recent lows along longer term MGS.

“We are assuming a start of upward pressure on core inflation towards end-2017, thereby pencilling in a forecast for 10-year MGS in the range of 4.00-4.25% by end-2017 and 4.25-4.5% by the end of the first quarter next year,’’ Chu noted.

Based on Bloomberg data, the 10-year government securities yield on Friday stood at 3.94. Historically, the 10-year Malaysia Government bond reached an all-time high of 5.35 in April of 2004 and a record low of 2.87 in January of 2009.

In terms of foreign fund flows in the debt market, RAM Ratings economist Kristina Fong said she does not expect to see again the extent of the rapid outflow experienced at the start of the year, but remains cautious on increased hawkishness of global central banks which may continue to contribute to some volatility in global fund flows this year.