Bond yields hit 3.58% in mid-March, but likely to retreat on expected OPR cut


THE yields of 10-year Malaysian Government Securities (MGS) spiked to 3.58% on March 19 from 2.84% at end-February this year, as fears of a global recession prompted by the Covid-19 pandemic rise.

RAM Rating Services Bhd economist Woon Khai Jhek said the yields rose following heavy off-loading by foreign investors in February, triggered by the unbridled spread of Covid-19 worldwide and Malaysia’s political upheaval.

“A staggering RM8.1 billion of net outflows was seen in February. In terms of supply, issuance of MGS or government investment issue (GII), and corporate bonds remained robust, with RM12 billion and RM10.7 billion respectively in February,” he said in a statement last Friday.

The current spike in MGS yields is, however, likely to be a knee-jerk reaction and yields are likely to retreat on account of further global monetary policy easing, including another potential rate cut by Bank Negara Malaysia (BNM) in coming months.

BNM and the US Federal Reserve cut their policy rates in March.

Malaysia’s central bank is expected to make the third Overnight Policy Rate cut of 2020 at its next meeting in May, in an attempt to prop up an already-battered domestic economy.

Last Thursday, BNM announced a 100-basis point (bps) cut in the Statutory Reserve Requirement (SRR) ratio from 3% to 2%, effective March 20.

Each principal dealer will also be able to recognise MGS and Malaysian GII of up to RM1 billion as part of the SRR compliance.

The combined measures will release some RM30 billion worth of liquidity into the domestic banking system.

Separately, Malaysian Rating Corp Bhd said the country’s corporate bond market saw record-high gross issuances and aggressive declines in yields last year.

“The total long-term corporate bond issuances surged to RM132 billion (RM103.9 billion in 2018) amid tightening credit spreads and a lower yield environment caused by easing monetary policies,” it said in a statement last Friday.

Yields on AAA- and AA-rated corporate bonds fell by 72bps to 89bps year-on-year (YoY) in 2019.

Yields for A-rated corporate bonds fell more sharply by 105bps to 236bps YoY in the same period. Meanwhile, national mortgage corporation Cagamas Bhd announced its RM450 million issuance comprising RM300 million two-year conventional medium-term notes and RM150 million of three-month conventional commercial papers.

Proceeds from the issuances will be used to fund the purchase of housing loans and Islamic home financing from the domestic financial system.

Cagamas president and CEO Datuk Chung Chee Leong (picture) attributed market uncertainties amid a challenging global economy and slower momentum in domestic activities, exacerbated by the recent Covid-19 outbreak, to investors shifting investments into safe-haven assets.

“Expectations of monetary policy easing by the market, coupled with the pending announcement of an economic stimulus package by the government, also provided support for the company’s fund-raising exercise,” he said in a recent statement.

Cagamas had priced its combined issues at 15bps, below the corresponding three-month Kuala Lumpur Interbank Offered Rate or equivalent to 2.94% on the pricing date.

The conclusion of the deals, representing Cagamas’ second issuance exercise this year, brings its year-to-date issuance to RM805 million.