What’s in store for the bond market in 2023?

Private refinancing initiatives, continued infrastructure financing needs and financial institutions’ capital augmentation are expected to propel corporate bond issuance

by AFIQ HANIF / pic MUHD AMIN NAHARUL

THE primary bond market activity was robust last year, with total corporate bond issuance surging to RM153 billion, up from RM114.3 billion in 2021.

“The prolific overall issuance last year was to a large extent fuelled by a major refinancing and fundraising exercise by Projek Lebuhraya Usahasama Bhd (Plus) in December 2022, which contributed RM25.2 billion or 16.5% of total corporate bond issuance,” said credit rating agency RAM Ratings Services Bhd in a statement.

It said the issuances from the financial (RM49.1 billion) and transportation and storage (RM44 billion) sectors dominated the primary bond market, together accounting for around 60.8% of overall supply.

“For 2023, we expect overall corporate bond issuance to reach RM120 billion-RM130 billion, propelled by private refinancing initiatives, continued infrastructure financing needs and financial institutions’ capital augmentation plans.

“Gross issuance of Malaysian Government Securities (MGS) and Government Investment Issue (GII rose for the third consecutive year to RM171.5 billion in 2022 (2021: RM163.9 billion), the largest on record. Looking ahead, we expect MGS and GII issuance to amount to RM170 billion-RM180 billion in 2023, taking into account the government’s deficit financing requirement, as well as the refinancing of debts maturing this year,” it said.

MGS refers to long-term interest-bearing debt securities issued by the government of Malaysia to raise funds from the domestic capital market for development expenditure. GII is long-term Islamic government securities, issued based on established Shariah principles.

RAM Ratings said that overall foreign fund flows turned negative (RM9.8 billion) in 2022 amid the broad and persistent bond market selloff last year, the first net foreign outflow since 2018. Selloff pressure appeared to wane towards the end of 2022 as the US Federal Reserve’s (Fed) messaging became less hawkish, hinting at a slower pace of rate hikes moving ahead.

“MGS and GII registered a net foreign inflow for the second consecutive month in December 2022 (RM2.7 billion). With expectations that the monetary policy setting will progressively normalise as the Fed moves closer to the end of its tightening cycle, the Malaysian bond market should see more favourable fund flows in 2023,” it said.

In its report, Malaysian Rating Corp Bhd (MARC Ratings) said the government raised RM171.5 billion in 2022, consisting of RM86.5 billion in MGS and RM85 billion in GII. The total numbers were up 4.7% from 2021’s RM163.9 billion and slightly above its projection of RM160 billion to RM170 billion. The average issue size for each offering also rose to RM4.8 billion from RM4 billion previously.

“Notwithstanding increased issuances, government bonds in the primary market continued to attract decent demand, though with interest skewed towards GII papers,” it said.

MARC Ratings foresees gross MGS/GII issuance to come in between RM175 billion and RM185 billion in 2023. This is in view of the Ministry of Finance’s (MoF) projected government budget deficit of RM99.1 billion and the RM77.3 billion worth of maturing MGS/GII. Government finances stretched by the pandemic crisis, however, remain the main risk to its projection.

Global Bonds

In its credit market report, RHB Investment Bank Bhd said from a global performance perspective, Malaysian bonds outperformed global bonds, Emerging Markets Investment Grade (IG), Asia ex-Japan Investment Grade (IG) and Asia ex-Japan High Yield (HY) in the 10-year period from 2013 to 2022, with the aggregate Malaysian bond index charting a 43.3% total return over the period.

“In 2022, only the Malaysian Index generated positive return, while other indexes recorded double-digit losses and the strong ringgit liquidity among local buyers created low volatility even in the highly-traded government securities.

“Low volatility is important for global asset managers seeking diversification and low correlation away from higher DM price fluctuations,” it said.

The US Treasury 10-year yield (UST10Y) spread compared to the MGS 10-year yield (MGS10Y) can indicate whether higher yields are coming for MGS10Y.

Typical Issuance

The Malaysian government bond market is the primary market for government debt securities in Malaysia. The government issues bonds to raise funds for various purposes such as infrastructure development and debt refinancing and also as a benchmark for other debt securities in the country.

The issuance pattern of Malaysian government bonds is typically done through regular auctions, which are usually held on a monthly basis.

The government issues a variety of bond types, such as the MGS, which is issued to raise funds for the government, and the MGII, which is issued to raise funds for specific projects or programmes.

The auction results of Malaysian government bonds are typically announced by the MoF after each auction. The results include the amount of bonds issued, the coupon rate, the yield and the total value of the bonds sold. The auction results are also published on the website of the Bank Negara Malaysia and the MoF.

According to MARC Ratings, the outlook for government bond yields is influenced by various factors such as economic conditions, inflation and fiscal policies. In the short-term, the outlook for Malaysian government bond yields may be influenced by the country’s economic conditions.

“If the economy is performing well, with low unemployment and high GDP growth, investors may demand higher yields to compensate for the increased risk. On the other hand, if the economy is performing poorly, with high unemployment and low GDP growth, investors may be willing to accept lower yields due to the lower perceived risk,” it said.

In the medium-term, MARC outlined the outlook for Malaysian government bond yields may be influenced by the country’s inflation rate.

“If inflation is high, the central bank may raise interest rates to curb inflation, which can lead to higher bond yields. On the other hand, if inflation is low, the central bank may lower interest rates, which can lead to lower bond yields.

“In the long-term, the outlook for Malaysian government bond yields may be influenced by the country’s fiscal policies. If the government is running a large budget deficit and is expected to continue doing so in the future, it may lead to higher bond yields as investors may demand higher returns to compensate for the increased perceived risk,” it said.

On the other hand, if the government is running a budget surplus and is expected to continue doing so in the future, it may lead to lower bond yields as investors may be willing to accept lower returns due to the lower perceived risk.

“It’s important to note that the bond yields are also influenced by the global economic conditions, monetary policies and geo-political events, so the outlook for bond yields can be quite dynamic and subject to change,” it said.

Local Issuance

Despite rising yields, MARC Ratings noted that local corporate bond issuance activities remained vibrant in 2022 with gross issuance of long-term bonds advancing by 34% year-on-year to a record high of RM153 billion (2021: RM114.2 billion).

It noted that outsized rated corporate bond issuances (2022: RM115.1 billion; 2021: RM61.2 billion) had helped offset declines in issuances in the unrated segment, namely unrated corporate bonds (2022: RM20 billion; 2021: RM24.8 billion) and bonds from quasi-government related entities (2022: RM18 billion; 2021: RM28.2 billion).

After Plus, it noted the next notable issuer was Cagamas Bhd, which raised a total of RM18.5 billion, a sharp rise of 73.1% from its 2021 issuance of RM10.7 billion.

Moving into 2023, it expects gross issuance of local long-term corporate bonds to normalise to between RM110 billion and RM120 billion.

Inflation

In 2022, aggressive monetary policy tightening by major central banks to tame persistently high inflation severely affected the global investment climate. MGS, also not spared the global bond rout, saw yields briefly hitting multi-year highs before ending the year higher by between 29 basis points (bps) and 140bps for all maturities.

Selling interest, skewed towards shorter-term notes, led to a flatter MGS yield curve with the 10y/3y gap narrowing to 42bps from 78bps in 2021.

“Moving forward, concerns over a global economic downturn, inflation and monetary policy will continue to shape the yield curve. We foresee Malaysia’s GDP growth pace coming in at a relatively modest 4.2% (2022F: 8.2%) on the back of diminishing base effects, higher cost of living, waning pent-up demand and tighter financial conditions,” MARC Ratings said.

While a recession in 2023 is unlikely based on current developments, the growth environment will become decidedly more challenging if geopolitical tensions worsen further.

A ramp-up in US rhetoric on China amid the gearing up of the presidential election campaign could put relations on a more precarious path.

There is also the nagging risk that the Ukraine-Russia conflict could worsen and cause further global supply chain disruptions. These developments, if they materialise, will drive financial market volatility further.

“We believe that Malaysia’s inflation has seen its peak, at least for now, with cost pressures easing on the back of abating supply chain bottlenecks and a recovering ringgit.

“A slowing economy and the lagged impact of interest rate hikes, which should become more apparent in the second half of 2023 (2H23), could add to further deceleration in inflation. We envisage inflation pace in 2023 moderating to circa 2.8% (2022F: 3.4%), which should be supportive of bonds, especially on the longer end,” it said.