by FARA AISYAH / pic by MUHD AMIN NAHARUL
RAM Rating Services Bhd (RAM Ratings) expects volatile capital flows to persist this year due to the uncertainties in the global financial market.
“There is a multitude of considerations for portfolio investors at this point — whether to pursue yields or seek safety in more conservative assets,” RAM Ratings head of research Kristina Fong (picture) said.
“As particular factors may dominate at different times, depending on prevailing market developments, volatile capital flows are envisaged to remain a key trend this year,” she added.
The rating agency noted that yields are expected to continue facing downward pressure in July, after investors received yet another clear sign of a looming rate cut after US Federal Reserve (Fed) chairman Jerome Powell’s remarks to the Congress on July 10, 2019, and another speech at a Paris event to commemorate Bretton Woods the following week.
Powell, during his speech, had reaffirmed the Fed’s concerns about economic prospects and is ready to take appropriate measures to maintain the recovery momentum.
RAM Ratings said these successive signals had prompted the market to start pricing in a potential 50-basis point (bps) cut, compared to the 25bps reduction indicated by the Fed funds futures market before Powell’s speech.
Moreover, foreign bond investors’ interest in Malaysian bonds rose in June with a net inflow of RM6.6 billion, following two consecutive months of net selling.
The rating agency said the renewed demand is mostly attributable to the increasing dovishness of central banks in major global economies amid weaker than expected economic data.
In line with the downward bias in global interest rates and the subsequent search for yields, domestic bond yields also retreated across the entire maturity spectrum and rating bands in June.
RAM Ratings said the stronger demand in the secondary market is mirrored by the primary market, as underlined by the robust bid-to-cover (BTC) ratios at government bond auctions last month.
Both issues that were up for tendering achieved BTC ratios of above two times.
Demand for the longer-tenured 20-year issuance of Government Investment Issues achieved a remarkably strong BTC ratio of 4.28 times, while the five-year Malaysian Government Securities charted 2.48 times.
Bank Negara Malaysia (BNM) has also maintained the Overnight Policy Rate (OPR) at 3%, taking into consideration the uncertain global economic environment.
“Leading indicators, however, point to a softening of the near-term global economic outlook with considerable downside risks remaining, primarily from prolonged trade tensions.
“While the prospects of monetary easing in major economies have somewhat eased global financial conditions, heightened policy uncertainty could lead to excessive financial market volatility,” BNM warned.
The central bank said at the current level of the OPR, the stance of monetary policy remains “accommodative and supportive of economic activity”.