Govt bond sell-off, 5Y swaps indicate market concerns
In the first quarter of 2022 (1Q22), Brent oil has averaged around US$98 per barrel versus around 80 US$ per barrel in 4Q21. RHB Investment Bank
KUCHING: The recent selloff in Malaysia’s government bond market along with Malaysia five-year (5Y) credit default swaps (CDS) staying at elevated levels indicates to RHB Investment Bank Bhd (RHB Investment Bank) that there are some market concerns related to Malaysia’s fiscal position along with other external factors and global portfolio adjustments driving sentiment.
According to RHB Investment Bank, concerns on the outlook for fuel and total subsidies could be one factor, not the only factor, that could be driving the negative sentiment in the bond and CDS market.
“In the first quarter of 2022 (1Q22), Brent oil has averaged around US$98 per barrel versus around 80 US$ per barrel in 4Q21,” the research firm said.
“Unless a recession materialises in Malaysia and Brent oil prices exceeds our peak US$100-130 per barrel range forecast for 2022, we foresee limited fiscal stability risks this year.”
RHB Investment Bank noted that oil price shocks do not necessarily generate recessions in Malaysia, with the exception of only one episode since 1970, which occurred in 1Q85-3Q86 as global real oil prices collapsed and impacted the economy negatively via the terms of trade channel in 1985-1986.
“The recent spike in yields in Malaysia’s government bond market and elevated Malaysia 5Y CDS indicates to us that there could be some macro level market concerns (along with other factors discussed in the next sections) such as the impact of the rising momentum of oil prices on the country’s fiscal position (as it relates to fuel and total subsidies).
“We advocate investors to fade the negative sentiment prevailing in Malaysia’s bond market.”
In the research firm’s view, higher oil prices up to around a peak of US$100-130 per barrel and with the caveat that recession risks remain limited, is positive for oil related revenues and will offset higher than what is programmed by the Ministry of Finance (MoF) for fuel and total subsidies (which includes fuel, food, and other items) in the 2022 budget.
“On the back of elevated oil prices, concerns on the outlook for fuel and total subsidies could be one factor, not the only factor, that could be driving the negative sentiment in the bond and CDS market.”
The research firm recognised external factors are also driving the momentum in these markets.
“These include the rapid move of UST10Y yields to 2.47 per cent on March 25 from 1.73 per cent on March 1, 2022, conflict in Ukraine, broad based outflows from Emerging Markets (EM) bonds, some political risk premium built into sentiment in the 5Y CDS market, thin trading volumes, and adjustments in global fixed income portfolios.”
RHB Investment Bank gathered that the MoF 2022 budget oil price assumption for Brent oil is US$67 per barrel, total subsidy of RM17.4 billion, and total oil related revenues of RM41.4 billion.