Boon to govt bond market as M’sia is removed from FTSE Russell watch list

WITH good news hard to come by in the country’s capital markets these days, news that Malaysia has been taken off the FTSE Russell watch list for potential downgrade in market accessibility level should bring some cheer to the country’s bond market.

An outcome of FTSE Russell’s bi-annual review, the decision means that Malaysia remains a constituent of the World Government Bond Index (WGBI) while removing the risk of the country being reclassified from its current Level ‘2’ rating.

To re-cap, Level ‘2’ is the minimum required for inclusion in WGBI. Malaysia was first placed on the watch list for a downgrade in March 2019.

CGS-CIMB Research commended Bank Negara Malaysia (BNM) for its efforts to improve the accessibility of the Malaysian Government bond market for foreign investors.

This is given FTSE Russell specifically cited initiatives to:

  • Improve secondary market bond liquidity through significantly more re-openings in 2021 of Malaysian Government Securities (MGS) issuances: The commitment entails switching (as needed) illiquid bonds out and replacing them with more liquid bonds by making more MGS available via repo, thus facilitating a marked increase in trading volumes and introducing physical settlement (with the option of cash settlement) of MGS futures, providing an additional interest rate hedging avenue, whilst aiming to simultaneously boost underlying bond liquidity.
  • Enhancing forex market structure and liquidity through increased price transparency after local trading hours: This is to be done via the now permanent appointed overseas office (AOO) programme, expanding the dynamic hedging programme to include Japanese trust banks and global custodians and streamlining forex documentation and due diligence processes.

On the hindsight, CGS-CIMB Research expects China’s inclusion into the WGBI to dilute Malaysia’s weight in WGBI from October onwards.

This is because FTSE Russell has also re-affirmed the inclusion of Chinese government bonds into WGBI with effect from Oct 29 on a 36-month phase-in period.

“China will hold a weight of 5.25%, resulting in a dilution of Malaysia’s weight from 0.39% to 0.37%,” projected economist Michelle Chia in an economic update.

With an estimated US$2.5 tril in total assets under management (AUM) tracking WGBI, the new weight implies net reduction in WGBI-related MGS holdings of US$500 mil or RM2 bil (or RM57 mil per month based on 36-month phase-in) which equates to 0.5% of MGS outstanding and 1.1% of foreign holdings of MGS.

“We view Malaysia’s removal from the watch list and the long phase-in period for China’s inclusion positively, providing a short-term boost to sentiment in the MGS market,” added CGS-CIMB Research. – March 30, 2021

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