Yields for MGS and corp bonds to increase slightly in 2019 — AmBank Research

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KUALA LUMPUR (Jan 17): AmBank Research is expecting the yields for Malaysian Government Securities (MGS) and corporate bonds to increase slightly from 2018, projecting the yields for the 10-year MGS at 4.1% with a +/- 1 standard deviation swing in 2019.

Nonetheless, the research house believes the upside in yields will be contained by a low inflation environment, a possible overnight policy rate cut in view of a moderate economic outlook, and an expected limited upside of US Treasury yields as the US Federal Reserve (Fed) rate hike aggressiveness slows to one or two.

"The 10y/3y and 20y/3y MGS spreads narrowed to 35bps and 104bps. Short-term yields climbed faster than long-end yields as expectations of a continuing rate hike by the US Fed gained momentum and it affected the local bond market," its  chief economist and head of research Dr Anthony Dass wrote in a note today.

He said combined with other unfavourable global developments, foreign holdings of local government bonds (govvies) fell and hence pressured the yields to move higher.

Yield also rose in the corporate bond space, especially those rated AAA and AA which on average increased by 2bps to 7bps, he said, adding that the bulk of the selling pressure came from the back-end till the belly of the curve.

The five-year blended credit spread (AAA, AA and A-rated) narrowed to 166bps in 2018 versus 183bps in 2017, the research house noted.

Meanwhile, Dass foresees the total gross issuance of MGS/Government Investment Issues (GII) in the primary market to hover around RM115 billion to RM125 billion in 2019.

"We derive our projection based on the government's projection of its fiscal deficit at RM52.1 billion and expect higher volume of matured MGS/GII papers at RM69 billion, versus RM62.8 billion in 2018," he said.

AmBank Research is also expecting the amount of net foreign outflows to moderate in 2019, cushioned by a gradual increase in the clarity of the Malaysian government's macro policies going forward; slower pace of interest rate hikes by the US Fed, likely one or two; and a more stable ringgit outlook.

This is despite the research house foreseeing foreign appetite to be influenced by uncertainties surrounding the US-China trade, prospects of the US dollar, Brexit, the US government political gridlock, elections (eurozone, India, Indonesia, Thailand and the Philippines), and the Chinese economic outlook, added with a moderating Malaysia's growth which will likely affect foreign investors' demand for local bonds.

Foreign shareholdings in MGS were at 38.4% or RM146.1 billion at end-December, significantly lower than 45.1% or RM164.4 billion in 2017, AmBank Research said.

At the same time, the GII segment recorded a net outflow of RM2.6 billion in 2018. The foreign shareholdings in GII papers stood at 5.2% end-2018 compared to 6.9% end-2017, it added.

In the private debt securities space, AmBank Research is expecting gross issuance to hover around RM80 billion to RM90 billion, based on the notion of softer public investment growth, a moderate gross domestic product (GDP) growth of 4.5%, and slower pace of global investment.

"We expect a material decline in the gross issuance of unrated government-guaranteed (GG) and infrastructure-related corporate bonds as a result of the government's reprioritisation efforts," Dass said.