The local bond market in April saw a sell-off across the curve with bond yields rising 2–7bps. During the month, the Malaysian ringgit (MYR) fell by 1.3% m/m and 5.4% y/y to end at 4.135 while on a monthly average, it slid 0.9% m/m and 5.84% y/y to 4.114.

The selling pressure was due to a slew of negative headlines such as: (1) the Norwegian sovereign fund exiting from EM bonds; (2) the announcement by the FTSE Russell to place Malaysia on the watch list for a potential disqualification from its flagship World Government Bond Index (WGBI); and (3) international rating agency Moody’s commenting that Malaysia risked falling into “negative credit”.

As a result, foreigners turned net sellers after two consecutive months of inflows with April’s total ringgit debt flows recording a net outflow of RM9.8bil or 12.8% of total ringgit debt outstanding. Outflows came from both the MGS and GII, each reporting RM3.5bil respectively. Hence, the MGS and GII foreign holdings exposure was reduced to 37.1% and 4.8% from 38.7% and 5.8% respectively in March.

With BNM having reduced the policy rate by 25bps to 3.00%, it should be positive for our bonds. We foresee the 10-year MGS hovering around 3.70%–3.75%. As for the USD/MYR outlook, our base case remains at 4.08– 4.10 by end-2019. But with the ongoing external noises and domestic challenges, our extreme case on the 10- year MGS yields could touch the 3.90%–4.00% levels while the USD/MYR swing could be around +/- 2% from the current levels depending on the severity of these noises.

Looking at the issuances of the MGS and GII in the primary market, at gross level, we expect it to be around RM120bil and RM125bil respectively. Meanwhile in 2019, the total amount of MGS/GII that will come into maturity is RM69.1bil. As at end-April, the total amount of MGS/GII matured is RM17.7bil, which means the balance that will come into maturity for the remaining months of the year is RM51.4bil. As for MYR corporate bonds and sukuks, we project a total issuance of RM80–RM85bil in 2019. As at end-April, with RM35.5bil issued, we estimate a balance of RM44.5bil to RM49.5bil to be issued in the remaining months of the year.

A. Yields and USD/MYR

• The local bond market in April saw a sell-off across the curve. During the month, bond yields rose across the curve by 2– 7bps as reflected in Charts 1 to 5. The Malaysian ringgit (MYR) in April fell 1.3% m/m and 5.4% y/y to end at 4.135. On a monthly average, the MYR slid 0.9% m/m and 5.84% y/y to 4.114 shown in Chart 6.

• The selling pressure in April was due to a slew of negative headlines. It started with news on the Norwegian sovereign fund exiting from EM bonds. Amongst the 10 countries, Malaysia is one of them. Our exposure to this fund is around US$1.96bil or about RM8.0bil in terms of government bonds. It translates to 5.3% of total foreign holdings as at endMarch 2019. As a result of this noise, our bond yields rose across the curve by 2–3bps. However, the yields eventually settled after 2 days of selling pressure suggesting that the impact from the exit will be gradual and not have significant impact on yields. During this period, the MYR fell from 4.08 to hover around the 4.09 levels.

• Another adverse news was the announcement by the FTSE Russell to place Malaysia on its watch list for a potential disqualification from its flagship World Government Bond Index (WGBI). Currently, Malaysia is assigned a “2” and has been included in the WGBI since 2007. The risk is to be downgraded to “1”. Estimations suggest our exposure with the FTSE Russell is around 0.4% which is about US$8bil or approximately RM32bil. It translates to 21.2% of foreign share holdings as at end-March 2019. Following this news, yields rose across the board by 7 to 16bps with the MYR trading between the 4.12 and 4.13 levels from 4.10, for about 4 days against the USD. However, the sell-off softened as confidence emerged that the local authorities would come out with some measures to prevent the FTSE Russell from dropping MYR bonds from its index. It saw yields settling around 3.85% and 3.88%.

• Finally, international rating agency Moody’s commented that Malaysia risk falling into “negative credit” given that the government plans to bail out Felda with RM6.2bil that could add on to the debt service ratio and also the fiscal deficit target. Our credit rating with Moody’s is currently A3 (Stable). The potential risk is that we could be maintained at A3 but lowered to “Negative” from “Stable” or drop one notch to Baa1.

• As a result of the jitters in the market, foreigners turned net sellers after two consecutive months of net buyers. Hence, in April, the total ringgit debt flows posted a net outflow of RM9.8bil or 12.8% of the total ringgit debt outstanding. Outflows were seen in both the MGS and GII, reporting a net outflow of RM3.5bil each which translates to 37.1% and 4.8% of foreign holdings respectively from 38.7% and 5.8% in March. Besides, foreign demand for local corporate bonds weakened with an outflow of RM1.5bil thus lowering foreign holdings to 1.8% in April from 2.1% in March.

• Meanwhile, foreign reserves rose 0.4% m/m to US$103.4bil in April from US$103.0bil in March. BNM’s net short forward positions in March eased to US$14.2bil from US$18.4bil in February and from its peak of US$22.8bil in October 2018.

• With BNM having reduced the policy rate by 25bps to 3.00%, it should be positive for our bonds. We foresee the 10-year MGS hovering around 3.70%–3.75%. As for the USD/MYR outlook, our base case remains at 4.08–4.10 by end-2019.

• But with the ongoing external noises and domestic challenges like: (1) trade policy tensions between the US and China that can play out into other areas like the auto industry, with large disruptions to global supply chains; (2) a downside risk to growth in countries like in the Eurozone and China; (3) Brexit noises; (4) a deterioration in global market sentiments that can rapidly tighten financing conditions; and (5) risk of the Fed making a mistake by downplaying the recent slide in inflation to be due to “transitory” factors, added with domestic challenges, these will cause volatility that could result in the 10-year yields touching the 3.90%–4.00% levels while the USD/MYR swing is around +/- 2% from the current levels depending on the severity of these noises.

B. Issuance Activities

• The government’s gross issuance totalled RM10.5bil in April or up 28.8% m/m, bringing the year-to-date (YTD) gross issuance to RM47.0bil or up 11.9% y/y. However, net issuance in April was only RM0.5bil after a 5-year GII paper that was issued in July 2013 with a size of RM10bil came into maturity. As a result, the combined total outstanding of the MGS and Government Investment Issue (GII) in April rose slightly by 0.1% m/m to RM714.5bil, bringing the YTD net issuance to RM29.8bil or up 26.7% y/y. Its ratio in percentage between the MGS and GII is 44%:56 as reflected in Tables 1 & 2.

• During the month, we saw the new issuance of the 5-year GII 10/24 which reported a bid-to-cover (BTC) ratio of 2.313x. In the case of the reopening of the 15-year MGS 11/33, the BTC was 2.792. However, the reopening of the 7-year 07/26 MGS saw the BTC at 1.510x which could be partly be due to the jitters that saw investors take a wait-and-see attitude as shown in Table 1.

• As for the secondary market, the MGS accounted for 58.0% of the trade while the GII made up the balance 42% in April. The primary focus during the month was on the long-term tenors above 10-years. This segment of the papers accounted for 28.6% of the total trade in April or RM87.3bil. Besides, there was a sizeable appetite for the 7Y-10Y MGS and GII papers, which made up of 18% of the RM87.3bil of total govvies traded during the month as shown in Chart 19.

• Meanwhile, corporate issuance activities moved in tandem with the govvies issuance. It rose by 4.7%m/m to RM10.4bil in April supported by an increase in government guarantees which made up 65.2% of the overall gross issuances. Top issuers were DanaInfra Nasional Bhd (RM3.8bil), Lembaga Pembiayaan Perumahan Sektor Awam (RM3.0bil) and Maybank Islamic (RM1.0bil). However, on a YTD basis, corporate issuances fell 10.8% y/y to RM35.5bil following a slower issuance in the PDS market reflecting a softening domestic demand.

• For the year 2019, we expect the total gross issuance of the MGS/GII in the primary market to be around RM120bil and RM125bil respectively. Meanwhile in 2019, the total amount of the MGS/GII that will come into maturity is RM69.1bil. As at end-April, the total amount of the MGS/GII matured is RM17.7bil, which means the balance that will come into maturity for the remaining months of the year is RM51.4bil as reflected in Table 2.

• Looking at MYR corporate bonds and sukuks, we project a total issuance of RM80–RM85bil in 2019. As at end-April, with RM35.5bil issued, we estimate a balance of RM44.5bil to RM49.5bil to be issued in the remaining months of the year.

Source: AmInvest Research - 10 May 2019