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THE bond markets have come into focus now, given the heightened expectations of an interest rate hike and also the high inflationary environment globally.
Bond yields have risen of late and their higher returns have gained the attention of some investors during these uncertain times.
The 10-year Malaysian Government Securities (MGS) last traded at a yield of 3.7% at press time after hitting a two-year low of 2.5% sometime in August 2020.
In comparison, most commercial banks are giving fixed deposit rates of 1.85% per annum presently.
“The rising bond yields are also an indicator of the higher inflationary expectations or anticipation of higher economic growth ahead as economies recover and reopen from the Covid-19 pandemic,” Areca Capital Sdn Bhd’s chief investment officer Edward Iskandar Toh tells StarBizWeek.
“MGS yields still have some room to climb further before they find their normal. Yields move in expectation of what you expect monetary policy to be, which takes into account both economic growth and inflation.
“If you think the economy will continue to grow, then the need to raise the interest rate is there, especially if inflation starts to kick in,” Toh adds.
Notably, Malaysian bonds such as the MGS had seen strong foreign inflows recently due to Malaysia’s unique position as a commodity exporter.
Foreign investors remained net buyers of RM3.1bil across most segments in Malaysian bonds for the third consecutive month in February, according to RAM Rating Services Bhd.
“This can be attributed to the country’s unique position as a net exporter of petroleum and palm oil. Brent crude price and crude palm oil price have skyrocketed on fears of a supply crunch amid sanctions imposed on Russia,” a RAM Rating Services spokesperson tells StarBizWeek.
“Investors were actively seeking to shield their investments from the heightened risk amid the Russia-Ukraine conflict last month.
“As such, despite the risk-off sentiment and broad market flight to safety last month, investors view Malaysia as being better-positioned than other emerging markets to weather the resultant economic shocks,” the RAM Ratings’ spokesperson adds.
The ratings agency also points out that the MGS yields usually track the benchmark 10-year US Treasury yields quite closely.
“Thus, as key global central banks move ahead to tighten global liquidity conditions, MGS yields are expected to continue their uptrend moving ahead.
“Our expectations are that Bank Negara will raise the overnight policy rate by 25 basis points in the second half of 2022.
“This would also translate to more upward pressures on bond yields this year,” RAM Ratings says.
However, participation in the bond markets is still mainly limited to institutional investors such as pension funds and asset management companies.
“It is not an easy task to get the retailers to participate in the bond market for these reasons: trading sizes are bigger, information flow is not as easily available and it can be a very technical instrument to trade in,” Toh says.
“For many years, the regulators such as the Securities Commission have been trying to stimulate retailer participation but low participation is a global issue.
“You can get the retailers interested but they will never be able to match up to the size of the institutions,” he adds.
RAM Ratings says that the country’s bond market structure is skewed towards institutional investors.
“Non-institutional investor participation in the bond market is currently limited to the more savvy, high-net-worth individuals, who can tap the wholesale bond market,” RAM Ratings says.
Some of the reasons that are hindering retailers participation include high barriers of entry to the wholesale bond market, lack of supply of retail bonds and unfamiliarity, says RAM Ratings.
According to the rating agency, there are only 12 retail bonds that are directly available to retail investors presently.
“It is also illiquid – an active secondary market for bonds in general, is absent.
“And there are many alternative investment products that could offer similar or higher potential returns such as unit trusts, exchange-traded funds or equity,” RAM Ratings adds.
The sole seasoned bonds distributor in Malaysia is iFast Capital Sdn Bhd which offers a range of bonds for retailers.
According to its manager in the fixed income division Tan Dao Hong, appetite from retailers towards bonds appears to be a “mixed bag” at the moment.
“We are a tech company and are market makers licensed under the Securities Commission Seasoning Framework. Unlike traditional sales channels, we chop up the bond lot size of RM250,000 into smaller sizes.
“We distribute MGS at a minimum lot size of RM10,000 while corporate bonds are at a minimum of RM1,000 to retailers.
“There are no issues with liquidity especially for MGS,” Tan tells StarBizWeek.
On a related matter, Areca Capital’s chief executive officer Danny Wong says the perception that bonds are always a safer asset class is not always true.
“For retail investors, if their intention is to hold the bond until maturity with the coupon, they must also accept the credit risk involved.
“If there is a high credit risk from the issuer, the risk is actually much higher than the equity market –because if the issuer defaults, the investor will not get anything back or maybe a steep discount from the principal.
“From a risk to reward perspective, dividend stocks may be a better choice than bonds,” Wong says.
“For the retailer, it is better to go for the safety in low-risk dividend stocks as the dividend yields may be higher and then there is the chance for capital gain.
“Bond yields are fixed once it is locked in, and if the security is not held till maturity – the price will go down,” Wong adds.
He notes that the bond market is generally very illiquid and coupled with the rising interest rate environment or expectations, there are few who would like to trade in bonds, since bond prices will drop as rates rise.
Written by: DANIEL KHOO
Disclaimer
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile.
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