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Malaysian Bond Market: Shaken and Stirred
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How would this impact Malaysia in the future?
Yield rises matter as their impact is not limited to just issuers and investors of bonds.
They can also influence sentiment in other capital markets and economic growth as borrowing costs become more expensive to a larger extent.
Government bond markets represent one of the best places to gain insights into shifting economic outlook and direction for interest rates.
For the majority of 2020, MGS yields have hit record lows amid aggressive rate cuts and flush of liquidity from foreign investors.
Since 2021, MGS yields are now hovering near pre-Covid 19 levels at around 3.60%.
MGS was primarily influenced by renewed fears of inflation exhibited by global markets brought upon by massive government spending.
The need for the Malaysian government to raise more debt as it cannot depend on revenue alone was also part of the problem.
Inflation fear in global bond markets first emerged in Q1 of 2021 as developed countries raced to reopen their economies.
Investors essentially believe that pent-up demand would stimulate fastened economic recovery.
New rounds of massive fiscal spending plan exacerbated demand, especially United States president Joe Biden’s US$1 trillion infrastructure spending bill.
The 10-year MGS yield peaked at 3.48% in March 2021 from its record low of 2.40% in August last year.
Come Q2 of 2021, the bond sell-off paused due to the rapid spread of the Delta variant of Covid-19, hampering many governments’ reopening plans.
However, this proved to be short-lived as food and commodity prices began to surge.
The price surges were due to supply disruptions caused by the reimplementation of lockdown measures.
The fear of escalating prices was restoked once again in August as governments decided to treat the Covid-19 pandemic as an endemic.
Lockdown measures were softened again as governments looked towards vaccination rates rather than infections rates as a target to reopen their economies.
There was also an increasing number of central banks pushing for higher interest rates and reduction in asset purchases as they worried about inflation.
The external environment would heighten the risk for Malaysia to experience a premature economic recovery as global policymakers are no longer providing support for the markets.
The Covid-19 pandemic has severely disrupted economic activities, although governments disbursed fiscal and monetary amid prolonged lockdown.
Now, global central banks are overwhelmed by fears of rising commodity prices while the rest of the world is reeling from Covid-19.
The Evergrande saga in China can provide vital clues for bond markets in the future.
China was one of the fastest countries to stop providing economic aid after hints of recovery.
China’s quick move to reduce its policy support and reigned in on excess debt saw elevated fears in its bond markets.
Bond issuers from the property sector faced increasing difficulty in honouring their payments.
It demonstrated the fragility of the economic recovery.
Corporates in China undertook huge debt when rates were low and bet big on reopening plans while the government reigns in on excess debt.
This scenario strongly signals the world markets that tightening monetary policies too quickly would cause a fallout as bond markets face additional pressure.
As a trading nation with the highest foreign holdings concentration in its bond market in Asean, Malaysia is very susceptible to such global shifts.
The government had unveiled the RM400bil development spending under the 12th Malaysia Plan to reset Malaysia’s economy and encourage foreign inflows.
This translates to about a RM80bil annual development expenditure, likely financed through debt, pressuring even higher yields.
Will Bank Negara raise the overnight policy rate (OPR) to control inflation? An OPR hike would further pressure yields higher, raising the cost of financing quickly.
It may seem too late as Malaysia is gradually reopening its economy after reverting to harsher lockdown measures and a state of emergency.
Malaysia’s economy is still battered by Covid-19 and faces ever-shifting political alliances that threaten long-term development plans.
Meanwhile, global central banks and governments are determined to remove pandemic-era stimulus aids to avoid overheating.
Can Malaysia follow suit so soon when its economy is shaken by the external environment and stirred by its domestic economic scarring?
The trend of rising yields is likely to continue in the future. A correction to an overdone rally to bonds is long overdue as global banks are set to raise interest rates.
Malaysia cannot escape from the fact that the government is more inclined to take on more debt than generate more revenue to recover from any crisis.
All signs are pointed towards higher borrowing costs for Malaysia while it struggles to keep its economy afloat.
Tan Jack Fong is senior analyst at Malaysia Rating Corp Bhd. The views expressed here are his own.
Source: Malaysian bond market: Shaken and stirred (2021, 09 October 2021. The Star. Retrieved from https://www.thestar.com.my/business/business-news/2021/10/09/malaysian-bond-market-shaken-and-stirred
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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