US stimulus ignites global bond rout, sell-off spreads to Malaysia

Selling pressure on MGS came after the EPF removed withdrawal conditions for its i-Sinar facility, says MARC


MALAYSIA financial markets were not spared from the global bond rout as the aggressive pick-up in yields in the US Treasuries market was also mirrored in the Malaysian Government Securities (MGS) market, said Malaysian Rating Corp Bhd (MARC).

The rating agency stated that selling pressure on MGS came after the Employees Provident Fund (EPF) removed withdrawal conditions for its i-Sinar facility.

“With the i-Sinar, combined with i-Lestari withdrawals and the voluntary reduction in employees’ 2021 share of statutory contribution rate to 9% from 11%, domestic investors believe the EPF will continue to reduce its local government bond holdings,” MARC noted in a statement last week.

The global bond rout deepened in February as the reflation trade continued to be a dominant theme, MARC said.

From the US to Germany and the UK, government bond yields ended the month with their biggest monthly surge in years.

The sell-off first started in the US amid positive progress on Biden’s RM7.8t Covid-19 relief bill (pic: Bloomberg)

“The sell-off first started in the US amid positive progress on US President Joe Biden’s US$1.9 trillion (RM7.81 trillion) Covid-19 relief bill, as well as a proposal for another stimulus worth US$2 trillion on infrastructure,” it said.

The rating agency added that investors had anticipated the US’ spending plans would raise inflation rapidly and overheat the economy.

This was exacerbated by the initiation of the global vaccination drive and with the dovish hold of global central banks, the yield curves have steepened significantly.

In contrast, bond markets in China were pretty much shielded from the global sell-off as volatility from the cash crunch in January has reduced.

“China Government Bonds (CGBs) recorded massive gains at the short end, while yields at the long end barely rose. The CGB market was supported by record foreign inflows,” MARC said.

While the US is embarking on a large-scale stimulus, China is sticking with its deleveraging campaign and market reforms to entice yield hunters, MARC added.

On the local front, the heavy supply of MGS and Government Investment Issues (GIIs) in February also contributed to the selling pressure as the gross issuance of MGS/GII amounted to RM12 billion, similar to the previous month despite the rising expectations of a faster economic recovery in 2021.

“Investors unwound their dovish bets as Malaysia’s headline inflation growth slowly moved upwards into positive territory.

“January’s consumer price index slipped 0.2% year-on-year (YoY) compared to a decline of 1.4% YoY in the previous month.

“Rising crude oil prices have stoked inflationary pressure in Malaysia,” MARC sstated.

The rating agency added that most of the selling pressure on MGS came from domestic investors as the local bond market continued to record foreign net inflows.

“Foreign investors continued to be the net buyers of local bonds for the 10th consecutive month in February.

“The local bond market recorded a total net foreign inflow of RM7.2 billion, bringing the total foreign holdings to RM233.8 billion which is the highest level since October 2016,” it said.

The inflows were primarily driven by greater surges in foreign holdings of MGS and GII.

“Foreign holdings of MGS amounted to RM183.1 billion (January: RM179.6 billion), equivalent to 41.2% of total outstanding MGS.

“The inflows into MGS were most probably concentrated along the ‘2y5y’ curve as positive yield differentials were little changed, negating some of the domestic selling pressure.

“Foreign demand was spurred by the relaxation of Movement Control Order and Malaysia’s earlier than expected vaccination drive,” the rating agency said.

By end-February, the MGS yield curve shifted upwards on a steepening bias with short-term yields

rising by one basis point (bp) to 10bps, while the longer-term yields were up by 20bps to 50bps, MARC added.

MARC expects the yield curve to steepen further with the 10-year MGS yield moving between 3.5% and 3.7% amid Malaysia’s latest RM20 billion stimulus package, and the US Federal Reserve’s (Fed) move to hold interest rates and the pace of bond purchases steady.

“Malaysian government’s newly proposed spending plans would heighten expectations of a heavier MGS/GII supply in 2021.

“We expect the Fed’s reiteration sharply upgrading its 2021 forecasts to continue to fuel reflation trades,” it said.

Despite the slump in economic growth due to the Covid-19 pandemic last year, MARC noted that its portfolio of corporate bond issuers remained steady with rating stability remaining high, downgrade rates remaining constant and no defaults recorded.

The rating agency reported a stability ratio of about 95.7%, similar to that in 2019 and higher than the long-term average of 87.2%.

“This was due to the high concentration of high-grade corporates in MARC’s portfolio, representing 91.4% of total corporates in 2020 compared to 91.3% in 2019.

“Although there has been some weakening in their credit profiles, they retained sufficient headroom in their respective ratings,” it noted in its 2020 Annual Corporate Default and Rating Transitions Study report issued last week.

MARC said its corporate portfolio experienced three downgrades in 2020 with the downgrade rate remaining constant at 4.3%, below the long-term average of 5.9%.

The downgrades were mainly due to pre-existing industry-specific overcapacity issues and project delays being exacerbated by the Covid-19 pandemic and subsequent lockdown measures.

“For three years in a row since 2017, there were no defaults recorded in MARC’s rating universe.

“The long-term annual corporate default rate for the 2000 to 2020 period fell to 1.8% against the 1.9% for the 2000 to 2019 period,” the agency said.

A further breakdown shows high-grade and high-yield long- term default rates easing to 0.7% and 7.7% respectively for the period, while its rating accuracy continued to exhibit improvement.

MARC uses the cumulative accuracy profile as a measure of rating accuracy to analyse the effectiveness of its ratings in predicting defaults across several time horizons.

For the 1998-2020 period, MARC’s one-year ratings accuracy ratio rose to 70.1% compared to 69.4% for the period of 1998 to 2019 due to the absence of high-grade defaults since 2014.

Its one-year rating accuracy ratio over the period of three and five years till 2020 stood at 81.6% and 98.2% respectively against 77% and 98.2% in 2019.