Foreigners Still Seek MGS

Foreigners Still Seek MGS - The persistent upward pressure will likely see Malaysian government bond yields surpassing last year’s level and exceeding the 4% mark this year.

Economists and bond analysts expect the Malaysian government securities (MGS) yields to stay elevated, although most agree it would not dampen investors’ appetite as prices for these instruments would be able to hold up. Bond yields and prices have an inverse relationship.

MGS yields have been on the uptrend recently, following the movement of the US treasuries (UST), which has shot up substantially since the beginning of the year.

The 10-year UST yield crept up by 54 basis points (bps) to 3% on April 24 from 2.46% on Jan 2. During the same period, the 10-year MGS yield had risen 29 bps to 4.2% from 3.91%. The recent spike in MGS yields has been due to the hawkish tone by the US Federal Reserve (Fed) to raise more rates this year, a slight weakness in the ringgit and the upcoming general election.

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“This is mildly higher from the end-2017 level of 3.91%. We expect the three-year MGS to hover near 3.55% by the fourth quarter, thus projecting the yield curve to remain relatively flat, assuming stable economic conditions.

“We expect the MGS against UST spreads along the 10-year tenures to tighten from 110-120 bps currently to 80-90 bps later in the year. The modest tightening means that returns from investing in Malaysia’s government bonds would remain very attractive vis-a-vis the UST,” he added.

Chu expected foreign investors to stick with Malaysia’s bonds, as it would remain offering returns of at least 80 bps more than the UST. He attributed this to the country’s solid economic fundamentals, with economic growth expected at above 5.00% whilst inflation to be contained and fiscal and trade balances as well as debt levels remaining controlled.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said while there could be some jitters in the market, he did not foresee the 10-year MGS yield surpassing its highest level attained at 4.46% after the US election in November 2016 in the near term.

“Overall, Malaysia’s positive economic growth outlook, improving business sentiment and supportive government policies and regulations should continue to drive demand for local bonds. This should help somewhat moderate the potential rise in the ringgit bond yields against a backdrop of interest rate increases by global central banks. As such, we expect the 10-year MGS yield to range between 3.9% and 4.4% in 2018,” he said.

Zahidi expects foreign holdings of local government bonds to continue rising towards year-end and record a net positive inflow. Meanwhile, RAM Ratings head of research Kristina Fong said up until March, the country had experienced a net inflow of foreign investment in bonds of RM3.5bil, a stark contrast to the significant net outflows seen in the first quarter of last year.

Overall, she said there was more foreign interest in emerging-market assets this year and for Malaysia, the strong macroeconomic story and benign inflation environment have made bonds even more attractive.

“Most of the bond flow changes so far this year are largely attributed to movements in short-term paper holdings driven by monetary policy tightening in global capital markets and other geopolitical uncertainties. This characteristic of fund flows is likely to continue this year,” Fong noted.

Maybank Kim Eng head of fixed income research Winson Phoon said while the ringgit was expected to continue to outperform regional currencies, the outlook on foreign fund flows to local bonds could be more challenging if the US dollar regains its strength against regional currencies.

“Our 10-year MGS target yield is 4.20% for 2018, which is about the current level. On average, MGS yields this year are expected to be slightly higher than 2017 because of the higher interest rate environment.

“It is natural for 10-year MGS and 10-year UST yield spreads to narrow in the US rate normalisation cycle. Compared to two to three years ago, the spread has noticeably narrowed. It could get narrower if the US Fed steepens its rate hike path because of, say, higher than expected inflation,” Phoon said.

In view of the encouraging signs of constructive resolutions to global trade and regional geo-political tensions, OCBC Bank (M) Bhd head of global treasury Stantley Tan felt this could open up the possibility of a further overnight policy rate or OPR hike sometime in the third quarter, which would move the interest rate swap rates and MGS yields higher.

“We expect the 10-year MGS to end 2018 at around 4.30%, given the upward pressure from higher global yields and Malaysia’s current growth prospects and supportive inflation dynamics,” he said.

Expressing a bullish view of the debt market, Maybank Kim Eng’s regional head of investment banking and advisory Caroline Teoh said the local corporate bond market started a robust 2018, recording a total issuance of RM29.6bil in the first quarter, up 7% from a year ago and being the strongest start seen over the past six years.

“The larger issuances came from infrastructure names such as Edra Energy (RM5.1bil), Danainfra (RM4.0bil) and Prasarana (RM3.0bil). We expect the strong issuance momentum to continue for the remainder of 2018 underpinned by funding for infrastructure-related projects (ie, the East Coast Rail Line and Pan Borneo Highway) and healthy domestic economic growth.

“Taking those factors into consideration, we forecast the corporate bonds’ gross supply to be RM110bil for 2018, with a larger portion of that figure being lon