By iFAST Research Team
ON March 29, FTSE Russell’s in its semi-annual country classification review for fixed income announced that Malaysia will be removed from the watchlist for potential reclassification of its market accessibility level from “2” to “1” and will retain its membership in the FTSE World Government Bond index.
The news allayed concerns that Malaysia Government Securities (MGS) and bond investors had on a potential MGS sell-off scenario should Malaysia be struck off the list as a removal would cause index tracking exchange traded funds (ETFs) to sell down their positions.
In its press release, FTSE Russell commended Bank Negara Malaysia’s (BNM) on-going engagement and initiatives to address the accessibility concerns which placed them on the watchlist since mid-2019.
The initiatives implemented by BNM includes the improvement in secondary market liquidity through more MGS re-openings in 2021, the ability to switch out illiquid bonds to more liquid bonds, and the increase in availability of MGS via the repo market, and the introduction of physical settlement of MGS futures as an option for interest rate hedging among others.
The enhancement of foreign exchange market structure and liquidity was also commended by the index provider as the inclusion of Japanese trust banks and global custodians to allow for the a more dynamic hedging programme under the Appointed Overseas Office (AOO) programme.
Government bond auction
On the back of positive news flow from the retainment of Malaysia on the WGBI Index, the following day saw the new issuance of 20.5Y Government Investment Issue (GII) maturing in September 2041 auction garnered strong support with a bid-to-cover ratio (BTC) of 2.57 times, the strongest bidding metric since mid-January 2021.
The strong interest saw a total of RM4 bil worth of GII issued (RM2 bil auction plus RM2 bil in private placement) with an average yield of 4.417% where the auction closed with a high/low of 4.435% and 4.390%.
Table 1: MGS and GII auction results since the beginning of the year
Foreign demand remains high
Despite beginning the year on multiple speedbumps which saw the number of COVID-19 cases of spike to new highs ranging in the four-digit territory which then saw a second round of movement control order (MCO) implemented and heightened political tension, foreign investors remain net buyers in Malaysian government bonds.
Most of this is due to yield-hunting activities as Malaysia still offers one of the highest interest differentials across the region. This saw an 11-consecutive month of net foreign inflow since May 2020 (inclusive of MGS and GII).
In March 2021, the world’s largest sovereign wealth fund that has a market value of NOK11.08 tril (RM5.48 tril) reported that it bought NOK11.34 bil (RM5.44 bil) worth of Malaysian government bonds as of Dec 31, 2020, underlying foreign investors’ appetite in our local government securities.
Yields to stabilise
The global bond rout which started in the US on the back of reflation trade fears remain a dominant theme.
This was on the back of the US$1.9 tril COVID-19 relief bill as well as the on-going proposal of the infrastructure package thought to be worth up to US$2.25 tril expected to be spent over the next eight years.
This caused the US Treasury 10-year yield to spike 1.74% as of March 31. The global rout in the US Treasury saw a spill-over to our local bond market which saw the 10-year MGS spike. This was also thought to be partly contributed by the easing of i-Sinar facility withdrawals by the Employees Provident Fund (EPF).
That being said, we have seen in recent days that the MGS yields have begun to stabilise.
The 10-year MGS which saw a spike to 3.485% on March 15 has retreated to 3.237% as of March 31. We believe this is due to the positive sentiment around the removal from the WGBI watchlist as well as the lower correlation between our local interest rate policy and US’ interest rate policy.
iFAST Research Team View
At this juncture, we are of the opinion that local bonds have begun to stabilise after the bond rout experienced in February and March this year.
New positive developments like FTSE Russell’s decisions to remove Malaysia from the watchlist and retain Malaysia in the WGBI – together with the strong demand indicated through the interest for government bond auction and foreign fund inflows – would boost Malaysian bonds further.
Additionally, with local inflation numbers remain stable and the possibility of a rate hike remains mute, we believe that investors should take the opportunity to lock in duration with higher yields at this point in time. – April 8, 2021
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The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.