Yield hunt boosts appetite for M’sian govt bonds

The domestic bond market achieved its 4th consecutive month of net foreign inflows in August at RM3b


THE trend of foreign buying of Malaysia Government Securities (MGS) and Government Investment Issue (GII) will likely to continue projecting a dovish stance, reflecting the recent change in the US Federal Reserve’s (Fed) policy framework, said RAM Rating Services Bhd (RAM Ratings).

The domestic bond market achieved its fourth consecutive month of net foreign inflows in August at RM3 billion, spurred by investors’ continued hunt for yields and the increasing weight of Malaysian government bonds in the JPMorgan Government Bond Index-Emerging Market, the rating agency said.

“The Fed recently changed its approach to inflation, from a fixed target of 2% to a flexible average target of 2%.

“With inflation mostly undershooting the targeted rate in the recent past, this policy change means that interest rates will only normalise much further down the road.

“The latest dot plot released in mid-September shows that Federal Open Market Committee members envisage rates to stay at near-zero through 2023,” it said in a statement yesterday.

The rating agency added that low-interest rates are expected to persist in the advanced economies before the rates would normalise earlier in emerging markets such as Malaysia.

“It will provide sustainably favourable yield differentials that may drive foreign inflows into the domestic market. Nonetheless, Malaysia’s watchlist status on FTSE Russell’s World Government Bond Index (WGBI) may impede such inflows.

“With that being said, the positive engagement between FTSE Russell and the regulatory authorities to improve foreign investors’ access diminishes the likelihood of Malaysia’s removal from the WGBI,” it said.

In August, long-term yields were mainly trending upwards, with the 10-year MGS rising 7.5 basis points month-on-month, said RAM Rating.

“This is attributable to heightened supply risk stemming from the lifting of Malaysia’s statutory debt limit from 55% to 60% of the GDP,” it said.

It added that the heightened supply concerns and softer investor appetite had led to markedly weaker bid-to-cover (BTC) ratios for MGS/GII tendered last month.

“The 15-year GII and 20-year MGS only attained respective BTC ratios of 1.42 and 1.47 times, instead of the usual average of around 2.4 times in past tenders,” it said.

The rating agency also noted that small and medium enterprises (SMEs) and micro businesses need supportive policies by the government to stay afloat mainly due to Malaysia’s weak economy.

According to the latest RAM Holdings Bhd’s Business Confidence Survey, the economy remained fragile with uncertain prospects over the next three months.

“The overall RAM Business Confidence Index for the third quarter of 2020, hit a low of 33.7. This is substantially below the neutral point of 50 and reflects the disruptions plaguing small businesses amid the Covid-19 pandemic.

“Almost 90% of the survey’s respondents cited weak economic conditions as their most significant challenge in the next three months,” it said in a statement.

It said the government has made commendable efforts to assist SMEs and micro-enterprises during the pandemic including the loan moratorium, which has been a highly sought-after financial relief; some 86% of the survey respondents have taken up this offer.

Of these, almost 90% need an extension beyond the expiry date of Sept 30 this year as cashflow remains tight.

More than half of the firms surveyed said that without an extension, they would face negative repercussions of either having to scale down or cease operations, or even default on their loan.

Most of the respondents also value wage subsidies (68%), loan subsidies (62%) and grants (66%) as aids to keep themselves afloat.

RAM Ratings noted that a targeted approach by the government, based on firm size and sector, is the best way to assist firms.

The rating agency revealed that amid the gloom, the survey reveals the resilience of SMEs and micro-enterprises even when prospects are bleak and challenges appear daunting as the majority of firms surveyed wanted to keep their businesses at the status quo instead of scaling down through the next three months.

It also indicates that businesses are hopeful demand will eventually recover in the medium term.