Malaysian bonds holding steady
MGS price has risen since early November, indicating investor appetite
PETALING JAYA: Malaysian government bond prices are holding up despite a global sell-off in bonds on positive economic growth outlook, ample liquidity and at least one expected rate hike by Bank Negara.
Bond analysts believe that despite central banks signalling tighter monetary policy, Malaysian bond prices will hold steady. They agreed that tighter monetary policy, which means higher benchmark interest rates, would only see bond yields rising at a measured pace. Bond yields and prices have an inverse relationship.
The benchmark 10-year Malaysian Government Securities (MGS) price has risen since early November, indicating appetite among investors for Malaysian government bonds. Indian bonds slid at the fastest pace in almost two decades, according to Bloomberg, with analysts expecting 10-year Indian note yields to rise as high as 7.50%.
Analysts do not expect a major sell-off by foreign investors and a huge repatriation of funds from the local debt market.
The interest rate hikes would only see yields rising at a measured pace in the event of policy rate adjustments and not be a major sell-off like how the market experienced following the US presidential election last year, they added.
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias does not expect the 10-year MGS yield to surpass the highest it has ever gone following the US presidential election, which was at 4.46%. Currently, the yield hovers at 3.89%.
Investors holding Malaysian debt will be watching closely the decision by Bank Negara’s monetary policy committee, widely expected to raise the overnight policy rate or OPR by 25 basis points (bps) to 3.25% when policymakers meet next month. The central bank had hinted of a rate hike in the November meeting.
Maybank Investment Bank fixed-income analyst Winson Phoon expects the rate hike to come only after the general election, with May being the earliest for a hike.
The monetary policy of major central banks such as the US Federal Reserve, the Bank of Japan and the European Central Bank (ECB) will also have an impact on investor appetite for bonds, and this will have an impact on Malaysian bonds too.
The market consensus remains three rate hikes by the Fed, while the ECB has announced slowing down the pace of bond-buying, which in effect would mean higher interest rates.
“We expect bond yields to adjust higher in a higher interest-rate environment both domestically and externally.
“The curve, which had bull-steepened likely on fast-money positioning flows, should flatten back after the rate hike,” he said, adding that in the event of rate hikes by both the Fed and Bank Negara, yield differentials (the spread between MGS and equivalent US Treasuries) would narrow, with MGS adjusting higher at a moderate pace relative to US yields.
Maybank Kim Eng regional head of investment banking and advisory Caroline Teoh forecasts the 10-year MGS yield to be at 4.1% by
the the first quarter of 2018, and to hit 4.2% by end-2018.
Teoh said the current MGS levels had already partially priced in a potential rate hike for the long end of the yield curve post-November monetary policy announcement. As for the short end of the yield curve, she anticipates investors to eventually account the probabilities in.
CIMB Investment Bank Bhd group head of treasury and markets Chu Kok Wei said the ample liquidity in the local market would balance out the expected rise in local yields.
He expects the three-year MGS to be at 3.55% by the end of the first quarter next year and 3.50% by the end of the fourth quarter. Chu projects 10-year MGS at 4.20% in the first quarter and 4.20% to 4.25% in the second half of 2018.
Commenting on fund flows, RAM Ratings economist Kristina Fong said although November’s performance was a reflection of a reversal in trends in foreign fund flows this year, the bond market still anticipates moderate outflow pressures next year, stemming from external global developments such as the finalisation of President Donald Trump’s tax bill overhaul and expectations of the relative pace and timing of future monetary policy tightening by the Fed.
More robust foreign investor demand for last month was seen particularly for short-dated government securities, which subsequently saw yields dive an average of 42 bps for three-month, six-month and one-year papers, she added.
Bank Negara’s financial market committee said in a statement that the local bond market had continued to attract investor interest.
“The last three primary auctions of government bonds recorded participation from diverse types of investors.
“Non-residents’ participation in the bond market increased to RM6.2bil in the fourth quarter of 2017, accounting for 27.4% of total government bonds outstanding as at Dec 20. For the year, the average bid-to-cover ratio stood at above two times.
“The average daily trading volume in the secondary bond market recorded a level of RM3.5bil in 2017. In November 2017, the MGS short-selling volume increased to RM1.6bil,” the central bank said.