Malaysia Bond Market Outlook 2018

Malaysia Bonds Stay Resilient

In a global environment marked by heightened geopolitical risks, stepped-up talks of trade protectionism and a cautious undertone lying beneath markets that have rallied strongly at the start of the year – the Malaysia bond market stands as an outlier providing positive yield for investors in an era of low or negative yield rates.

Despite the prospect of tightening monetary conditions, and policy uncertainty surrounding a tumultuous administration led by US President Donald Trump, the local bond market held up strongly providing decent yields for bond investors.

The Quantshop MGS All-Index and BPAM Corp Bond All-Index yielded 1-year returns of 5.60% and 5.28% respectively in 2017.

Real Money Investors to Stem Fund Outflows

Underpinned by sound economic fundamentals, an increase in external reserves, along with an expansion in the current account surplus – we see these improving fiscal conditions to be supportive of fund flows into the local bond market.

The Ringgit has been on a steady climb and has rallied by over 3.66% YTD (as at 30 January), closing at 3.899 and would strengthen the risk-appetite for Ringgit-denominated bonds among investors.

Overall net inflows of foreign debt securities increased by RM2.7 billion in December’17, buoyed by inflows into both MGS of RM4.1 billion and GII of RM0.6 billion. Total foreign holdings of both MGS and GII, accordingly rose to 45.1% and 6.9% respectively in December.

Due to this recent large accumulation of government debt by foreign investors, some risk of reversal cannot be discounted, especially if the Ringgit strength starts to wane.

However, we do note that a large portion of the foreign flows are from real money investors such as pension funds, sovereign wealth funds and asset management companies who hold a more longer-term view in their investment horizons and tend to be more sticky.

Yields to Hold Up in Tightening Environment

Dispelling any further uncertainty of the timing of its interest rate hike decision, Bank Negara Malaysia (BNM) went ahead and pulled the trigger to raise its benchmark interest rate by 25bps to 3.25% at its policy meeting on 25 January.

We view the rate hike as more of a reversal from the central bank’s decision to cut rates in 2016 to pre-empt headwinds from the surprise Brexit vote, as opposed to the central bank signalling a more aggressive tightening bias.

The rate hike was not entirely unexpected given the fundamental strength seen in the broader economy, and the stronger growth outlook expected for 2018. The government is already forecasting a growth of 5.5% for 2018 on expectations that global trade and rising domestic spending will provide support.

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