HEIGHTENED concerns over the escalating Covid-19 outbreak in the US and the consequent impact on the global economy have derailed foreign interest in the Malaysian bond market in June, according to RAM Rating Services Bhd.
Additionally, the rating agency noted that the government’s Penjana stimulus package totalling RM35 bil has also raised investors’ concerns about the wider fiscal deficit and debt levels.
Supported by a more upbeat global sentiment, foreign interest returned to the Malaysian bond market in May after three consecutive months of net outflows totalling RM22.4 bil.
RAM Ratings said the current concerns have pushed up the 10-year Malaysian Government Securities (MGS) yield by 25.5bps to a peak of 3.12% on June 9 before swiftly retreating below 3%.
“Since then, this benchmark yield has stayed above the level seen throughout May (average yield: 2.89%) on account of persistent foreign investor risk aversion,” it said in a June 22 statement. “This trend suggests that foreign buying of MGS is likely to remain dull for the rest of June.”
Over the longer term, RAM Ratings foresees that the all-time low global interest rates amid liquidity-boosting measures by central banks would continue to suppress domestic bond yields.
At the last Federal Open Market Committee meeting on June 10, the US Federal Reserve indicated that the benchmark short-term interest rate will remain near zero through 2022.
“Similarly, expectations of further Overnight Policy Rate cuts by Bank Negara in 2H20 would also keep a lid on domestic bond yields,” noted RAM Ratings.
Launched in June, the Penjana stimulus package is expected to widen Malaysia’s fiscal deficit to 5.8%-6% of gross domestic product (from RAM Ratings’ previous projection of 4.8%).
Given the government’s intention to fund this deficit domestically, RAM Ratings has revised its MGS/GII issuance to RM155 bil-RM165 bil for 2020 from the previous RM135 bil-RM145 bil. – June 23, 2020
