Bank Negara Malaysia (BNM) should take heed of the fiscal deficit after bond market yields rose in the aftermath of the government’s introduction of an RM35 bil Covid-19 relief package, Bloomberg columnist Marcus Wong wrote in his article today.
Malaysia’s 10-year yield briefly climbed above 3% this week, from as low as 2.79% in May, after Prime Minister Muhyiddin Yassin’s government pledged to pump in another RM35 bil to counter the impact of Covid-19. In March, Putrajaya announced an RM260 bil package to aid the economy.
The government is now forecasting the fiscal deficit to widen to 5.8% to 6% of gross domestic product, the most in a decade. Malaysia’s fiscal deficit stood at 3.4% at the end of 2019.
“Demand for bonds by domestic investors was lacklustre even before the latest round of stimulus was announced on June 5. Total bids at an auction of three-year Islamic debt on June 3 only just scraped in above the amount on offer, compared with a bid-to-cover ratio of more than three times at a similar sale of 10-year Islamic securities in April,” Wong wrote.
According to Wong, the spread between benchmark 10-year yields and the central bank’s Overnight Policy Rate of 2% has more than doubled over the past six weeks. It climbed above 100 basis points earlier this week, matching the peak seen at the height of the coronavirus sell-off in March.
Wong said while BNM has already lowered the reserve requirement ratio for local banks by 100 basis points to 2% and included bonds as reserve-compliant assets, there is room to go further.
“Malaysian policymakers can point to other factors that will help prop the bond market even without their intervention. The recent doubling of Brent crude to around US$40 per barrel will be positive for the nation’s budgetary position, while muted inflationary pressures will continue to underpin real yields.
“In the near term, it’s likely Malaysian bonds will remain under pressure unless the central bank takes further steps to boost demand,” he said. – June 12, 2020
