Fed rate hikes to see more selldown in short-dated Malaysian Government Securities

At the same time, several of them are also not revising downwards their bonds projections issuance despite the huge selldown of Malaysian Government bonds.

Bond Pricing Agency Malaysia Sdn Bhd (BPAM) CEO Meor Amri Meor Ayob agreed there could be more selling in the short-dated papers relative to long dated papers should the bond market face further selldown due to speculations related to the US Fed fund rate.

“For the month of March, the Malaysian Government Securities (MGS) curve ended the month flatter as the shorter end of the curve (3-year and below) edged higher by 15 to 22 basis points (bps) while the longer end of the curve (10-year and above) inched up by less than 5 bps from the start of the month.

“This implies that the short end of the curve is more prone to market selldown in light of policy rate speculations,’’ he told StarBiz.

Analysts and market observers expect at least two more rate hikes this year after a 25-basis point hike in the federal funds rate last month.

“The further selldown in MGS in March was largely underpinned by the prospect of three rate hikes by the US Fed this year. However, with the conclusion of the Federal Open Market Committee’s meeting with a slightly less hawkish tone by the Fed in March, we expect the sell down to subside in the upcoming months barring any unexpected macroeconomic developments in the market,’’ he noted.

Foreign holdings of MGS as at March this year stood at 38.5% compared with 44.7% in February.

Foreign shareholding of Government bonds (MGS and Government Investment Issue (GII) for March stood at about 25% against close to 30% on February.

Meanwhile, CIMB Group head of treasury and markets Chu Kok Wei is projecting the 3-year MGS to close in range of 3.25-3.50% and 10-year MGS in a range of 4.25-4.50% by end of this year. Current levels are 3.46% for the 3-year MGS and 4.10% for the 10-year MGS.

“We think Malaysian government bond yields already appear toppish. Thus, upward pressure from both inflation and higher rates would not necessarily lead to a huge selldown in Malaysian bonds. The 10-year MGS is only around 4.10% currently.

Pricing in inflationary pressure should only take the 10-year MGS to within our 4.25-4.50% forecast. Meanwhile, the 3-year MGS is about 50 bps above the overnight policy rate of 3.00%.

“Historical mean of this spread is closer to 30bps.

“Thus, current pricing of the 3-year MGS is basically already pricing in a 25 bps rate hike. So, an upward trajectory in 3-year yields also appears limited.”

RAM Ratings head of research and economist Kristina Fong said in the first two months of the year, most of this rationalisation in foreign bond holdings was attributed to the longer term securities.

However, she said the month of March marked a significant sell-down in short-terms papers too, somewhat exacerbated by the Fed hike during the month.

She noted that foreign investor bond net outflow so far this year has amounted to RM37.4bil. “

We continue to hold the notion that the majority of foreign bond investors who are not rolling over their investments in the market are the ‘non-sticky’ or ‘non-institutionalised’ investor base.

The recent Bank Negara and Securities Commission’s initiatives to deepen onshore liquidity do have the scope to increase liquidity to facilitate sufficient hedging activities, but we do note that normalisation in the market will take some time,’’ she said.

Fong said the rating agency has maintained its gross government securities forecast at RM100bil -RM110bil this year as it is premised on fiscal deficit funding needs and there continues to be take-up in the market.

On the other hand, corporate bond issuance has been strong this year, especially in March.

In anticipation of further Fed hikes going ahead, RAM Ratings anticipate the issuance momentum to continue in the near-term and as such has also maintained its gross issuance forecasts for corporate bonds at RM75bil-RM85bil this year.

CIMB Investment Bank Bhd senior managing director and global head of capital markets Nor Masliza Sulaiman said there is no revision to the bank’s forecast of bond issuance as it continue to expect primary bond activity to remain robust for 2017.

“We continue to expect primary bond activity to remain robust this year.

“Assuming sustained economic growth in 2017 of 4-5% based on the Government’s target, we expect primary ringgit denominated corporate bond offerings to reach RM80-RM90bil this year, which is higher than the total RM77.9bil bonds/sukuk issued in 2016 (based on total credited amount on Bloomberg).

“In the first quarter of 2017 we have seen total issuances of RM23bil which has surpassed 2016’s first quarter’s issued amount of RM17bil,’’ she said.