Bond yields to remain steady next year
They are expected to hold up amid Fed and Bank Negara’s hawkish stance on rates
PETALING JAYA: Bond yields are anticipated to hold up to the pressure of interest rake hikes next year, with the 10-year Malaysian Government Securities (MGS) yield not expected to exceed the 4.46% level attained during the post-US election amid a hawkish stance by Bank Negara and the US Federal Reserve.
At its latest Monetary Policy Committee (MPC) meeting on Nov 9, although the overnight policy rate (OPR) was maintained at 3%, the central bank signalled that the benchmark OPR has room to be raised.
The bank said it may consider reviewing the current degree of monetary accommodation, given the strength of the global and domestic macroeconomic conditions.
Analysts and economists agree that bond yields could sustain the pressure from interest rate hikes due, among others, to the factoring of interest rake hikes next year, ample liquidity in the market and positive economic growth outlook.
This could see yields rising only at a measured pace in the event of policy rate adjustments, they added.
Maybank Kim Eng regional head for investment banking and advisory Caroline Teoh told StarBiz she forecast the 10-year MGS yield to be at 4.1% by end-2017, and to hit 4.2% by end-2018.
“An OPR hike will typically impact bond yield curves in the market.
“However, post the MPC announcement on Nov 9, we believe that current MGS levels have already partially priced-in a potential rate hike for the long-end of the yield curve. As for the short-end of the yield curve, we anticipate investors to eventually account the probabilities in.
“Although yield curves and interest rates are major drivers in the bond/sukuk market’s supply, and impending yields being higher, we do not expect the ringgit primary bond markets to be majorly affected.
“Primary markets are still expected to be stable in 2018, given the considerations of both government and corporate bonds sectors, which include meeting funding requirements, capital markets access for liquidity and the refinancing of maturing debt in 2018.”
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said although there may be jitters in the market but he does not expect a significant rise in bond yields even if the central bank raises the OPR next year.
He does not anticipate the 10-year MGS yield to surpass its highest level attained postUS election in November 2016, which was at 4.46%.
“The magnitude of yield increases will depend on, among others, on the pace of the federal funds rate and OPR hikes, the prospect of the Malaysian economy in 2018 and the trend in the ringgit against the US dollar.
“Overall, the positive economic growth outlook, improving business sentiment, supportive government policies and regulations and the firmer ringgit would continue to drive demand for local bonds, moderating the potential rise in yields caused by interest rate increases by central banks,” Zahidi noted.
Meanwhile, CIMB Investment Bank group head of treasury and markets Chu Kok Wei said policy rate adjustments are expected to moderately impact yields in a measured pace as there is ample liquidity in the local market.
He said short to medium tenor MGS yields were already more than 50 basis points (bps) above the current OPR. This meant that short to medium tenor MGS have already priced in a hike in OPR from current 3.00% to 3.25% in the near term.
“We don’t expect short tenor yields to rise much from current levels even after the next hike, as this may be followed by a prolonged period of lull before a stronger case for further monetary tightening appears if any.
“Our projection for three-year MGS is 3.55% by-end of the first quarter next year and this could move lower to 3.50% by end of the fourth quarter of 2018. For 10-year MGS, our projection is 4.20% for the first quarter and 4.20-4.25% in the second half of 2018,’’ Chu added.
Commenting on the movement of the yield curves, Bond Pricing Agency Malaysia Sdn Bhd (BPAM) CEO Meor Amri Meor Ayob said the MGS yield curves before and after the latest conclusion of the MPC meeting, indicated an upward shift in the yield curve immediately after the meeting.
However, he said yields have lowered despite the more hawkish tone by Bank Negara and expectations of an OPR hike next year. Notwithstanding further hawkish stance by Bank Negara as well as the US Fed, interest rates are expected to linger around the current levels, Meor noted.
Bond issuance and challenges
RAM Ratings economist Kristina Fong said its full-year expectations for corporate issuance for 2018 were at RM90bil-RM100bil, mostly coming from a sturdy pipeline of new issuances from the financial institutions and infrastructure sectors which form over 60% of issuances in the market.
“Our forecast has taken into consideration expectations concerning both the global and domestic tightening cycles which we anticipate will dampen issuance activities after a bumper issuance of RM105bil-RM115bil in 2017.
“Moreover, much of the better than expected issuance activities this year was largely attributed to the locking-in of more favourable rates ahead of the quickening pace of monetary tightening abroad and its potential spillover effects on domestic cost of funding.
“Taking into account of the government’s deficit financing requirements next year, gross government bond issuance should reach RM100bil-RM110bil in 2018, a similar range to this year’s expectations,’’ she said.
On the projection of bond issuance, OCBC Bank (M) Bhd head of global treasury Stantley Tan noted that going by the budget deficit of 2.8% of GDP announced by the Government in their latest budget, projection for 2018 MGS/ Government Investment Issue (GII) issuance estimated to be at RM109bil, including rollover of bonds maturing next year.
Historically, he said first half of the year, issuance would be about half of the total projection amount, at about RM50bil to RM55bil.
Teoh said she was retaining 2017’s issuance forecast for 2018, with government bonds (MGS+GII) of around RM107bil, and corporate bonds to hit a volume of RM95– RM100bil.
CIMB Investment Bank Bhd senior managing director and global head of capital markets Nor Masliza Sulaiman foresee about RM90bil in corporate bond issuance in 2018. Primary deals with no fixed drawdowns may optimise offerings in the first half of 2018, she said.
“We remain confident that rates in general will remain accommodative even with potential policy rate adjustments and is unlikely to affect the borrowing requirements and the corporate bond pipeline.
“The issuance pipeline largely depends on the requirements of borrowers, be it the Government or companies.
“As announced in the Budget 2018, there are several infrastructure projects that are expected to kick off in 2018, with funding requirements of up to RM1 trillion, and we expect a large proportion of this to be funded via the bond markets over the next few years,’’ Masliza said.
Apart from the change in monetary policy stance by the central bank, Meor Amri believe that the upcoming 14th General Election in the country, the overall economic health, ongoing geopolitical tensions around the globe and the recovery path of commodity prices would be the key factors that will impact the growth of the bond market in 2018.