BLEAK NEAR-TERM OUTLOOK
Weaker ringgit, dwindling returns may deter interest in Malaysia’s sovereign, corporate bonds
FOREIGN investors’ appetite for Malaysia’s sovereign and corporate bonds will likely decrease this year amid a weakening ringgit, dwindling hedged returns and slowing global economic activity.
Economists said the country’s sovereign bonds in particular faced a bleak prospect over the near term due to the negative sentiment surrounding the local note.
“Currency views matter for foreign investors as the fluctuation in the exchange rate is also part of their investment return composition,” said Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid.
However, he noted that the Malaysian Government Securities (MGS) yields were on the uptrend due to the higher United States Treasury (UST) yields.
“There is a strong correlation between the 10-year UST and 10-year MGS yields at 72 per cent. Since the Federal Reserve (Fed) is unlikely to cut the interest rate in the near term, UST yields have gone up, leading to higher MGS yields,” he added.
The demand for MGS had been decent this year, said Afzanizam.
“The RM5 billion Government Investment Issues (GII) issuance maturing on July 31, 2028 drew total bids of RM22 billion last month, with a bid-to-cover ratio of 4.4 times,” he noted.
Afzanizam noted the cautious stance on both corporate and government bonds, highlighting the potential for profit in the bond market due to expectations of an interest rate reduction by the Fed.
“At the end of the day, it is about the interest rate outlook, especially in the US. I believe that fixed-income investors should be mindful of the duration risk as they don’t want to expose themselves to the interest rate risk. Perhaps, a shorter tenure would be preferable if they want to trade.”
The domestic bond market was rattled last month by the Fed’s hawkish shift, which triggered a net outflow of foreign funds, said Kenanga Investment Bank Bhd (Kenanga Research).
For the second consecutive month, foreign investors reduced their exposure to Malaysia’s debt securities with a net outflow of RM5.1 billion (December: -RM2.1 billion),
mainly driven by a sell-off in MGS and Malaysian Treasury Bills (MTB).
Consequently, total foreign debt holdings declined to RM265.3 billion last month (December: RM270.4 billion), with its share of the total outstanding debt reaching an 11-month low of 13.2 per cent (December: 13.6 per cent).
Kenanga Research said while investors might continue to hold US debt for awhile longer due to its attractive yields and high coupons, the anticipated Fed rate cuts in the second half of this year could lessen their interest, especially in Treasury floaters.
“As the Fed Fund rates decrease, investors seeking to maintain their yields may turn towards high-yielding emerging market debt, especially to countries where central banks are not planning rate cuts,” it added.
SPI Asset Management managing director Stephen Innes said with UST yields being much higher than MGS, Malaysian bonds were primarily attractive to domestic investors.
“However, while international funds, which require full hedging against currency risk, are deterred, hedge funds seeking higher yields without hedging currency risk could potentially profit significantly once the currency appreciates.
“We currently do not own MGS but we will buy 10-year on an unhedged basis once the US economic data weakens or there is proof that last month’s acceleration in US inflation was a seasonal lark,” he added.
He also expects Bank Negara Malaysia’s monetary policy to remain neutral for a while due to the weaker ringgit.
“Bank Negara may want to cut rates but the weak ringgit is preventing it,” he said.
Additionally, he said the rising supply of US corporate and government bonds had led to weaker bidto-cover ratios as investors became more selective and demanded higher term premiums.
“The weakness in bid-to-cover ratios across the board indicates cautious investor sentiment in the bond market,” he added.