Thursday 28 Mar 2024
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KUALA LUMPUR (Jan 16): Gross issuance of Malaysian government securities and government investment issues (MGS/GII) is expected to come within RM105 billion to RM110 billion — the highest since 2013 — with the MGS/GII ratio remaining at around 55:45, according to the Malaysian Rating Corp Bhd (MARC).

This forecast is premised on higher budget deficit of around RM40.3 billion for the year as projected by the Ministry of Finance (MoF), and the large RM66.8 billion worth of MGS/GII that will mature in the same period, according to its report: 2017 Bond Market Outlook: Bracing for a Hawkish Fed.

In the Malaysian primary bond market, the government raised RM86 billion from 29 offerings in 2016, less than 2015’s RM92.5 billion, it said.

Foreign holdings of local govvies, which has been trending up since the beginning of the year, fell sharply after the U.S, election, as sentiments shifted, it said. It pared down to 32.1% of total outstanding (MGS: 47.1%, GII: 9.2%) in December, from 2016’s high of 36% of total outstanding (MGS: 51.9%, GII: 12.6%) in October.

“The possibility of a more aggressive rate hike by the Fed in 2017 on the back of rising inflationary pressure, is the main concern among bond investors,” it said.

However, MARC does not expect the Fed to raise interest rates more than three times in 2017, as policy makers fully assess the impact of the new administration’s policies. 

“In addition, the possibility of tighter financial conditions attributed to the appreciation of the U.S, dollar, could also limit the number of rate hikes. Against this backdrop, we have a mildly bearish view on USTs (US Treasuries). 

“On one hand, the prospects of higher UST issuances on the back of an expansionary fiscal policy would continue to exert upward pressure on the yields, especially at the long end. On the other hand, a sharp increase in yields is unlikely due to the safe-haven status of the USTs, the threat of geopolitical instability and the divergence of the monetary policies between U.S. and the rest of the world,” it said.

As such, though MARC thinks foreign holdings will decline further in the short term due to uncertainties over Donald Trump’s future policies and the prospects of further depreciation in the ringgit against the greenback, it should stabilise in the medium-term, “as a bigger chunk of the government bonds are in the hands of ‘long-term investors’, such as central banks and pension funds”.

Going forward, MARC is of the view that the 10-year MGS yield will remain on the uptrend, ranging between 4.0% and 4.5%, as the Malaysian bond market continues to be closely monitored due to a high proportion of foreign holdings in the region.

“However, some stabilisation should emerge in the medium term, upon greater clarity over Trump’s future economic plans,” it said.

Domestically, it said higher inflation expectations and limited prospects of a key rate cut by Bank Negara Malaysia (BNM) — which it expects to be left unchanged at 3% in its base-case scenario — would also pressure Malaysian bond yields.

Should it be necessary for BNM to trim the key rate, it would likely be limited to 25 basis points, it opined. 

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