Malaysian bond market: shaken and restless

The BIG central bank push for higher interest rates marked a turning point for bonds as their yields rose.

What impact will this have on Malaysia in the future?

Yield increases are important because their impact is not limited to bond issuers and investors.

They can also influence sentiment in other capital markets and economic growth, as borrowing costs become higher to a greater extent.

The government bond markets are one of the best places to get a glimpse of the changing economic outlook and the direction of interest rates.

For most of 2020, AMS yields have reached record highs amid aggressive rate cuts and cash flow from foreign investors.

As of 2021, AMS yields have now hovered around pre-Covid 19 levels, at around 3.60%.

MGS was primarily influenced by the renewed fears of inflation manifested by world markets due to massive government spending.

Also part of the problem was the need for the Malaysian government to take on more debt as it cannot depend on income alone.

Fear of inflation in global bond markets first surfaced in the first quarter of 2021, as developed countries rushed to reopen their economies.

Investors essentially believe pent-up demand would spur an accelerated economic recovery.

New rounds of massive budget spending plans have exacerbated demand, particularly US President Joe Biden’s $ 1 trillion infrastructure spending bill.

The yield on the 10-year AMS peaked at 3.48% in March 2021 from its all-time low of 2.40% in August of last year.

In the second quarter of 2021, bond sales halted due to the rapid spread of the Delta variant of Covid-19, hampering plans for many governments to reopen.

However, this proved to be short-lived as food and commodity prices started to soar.

The price spikes were due to supply disruptions caused by the re-application of foreclosure measures.

Fears of a spike in prices were rekindled once again in August, as governments decided to treat the Covid-19 pandemic as endemic.

Lockdown measures were relaxed again as governments turned to vaccination rates rather than infection rates as a goal of reopening their economies.

There were also a growing number of central banks pushing for higher interest rates and reduced asset purchases as they worried about inflation.

The external environment would increase the risk for Malaysia of experiencing a premature economic recovery as global policymakers no longer support the markets.

The Covid-19 pandemic has severely disrupted economic activities, although governments have made budgetary and monetary disbursements in a context of prolonged containment.

Now, global central banks are overwhelmed by fears of rising commodity prices as the rest of the world is reeling from Covid-19.

The Evergrande saga in China may provide vital clues for bond markets going forward.

China was one of the fastest countries to stop providing economic aid after signs of recovery.

China’s swift decision to reduce political support and bring excess debt under control has raised fears in its bond markets.

Real estate bond issuers have found it increasingly difficult to honor their payments.

He demonstrated the fragility of the economic recovery.

Chinese companies took on huge debt when rates were low and bet big on plans to reopen while the government ruled over excess debt.

This scenario is a strong signal to global markets that too rapid tightening of monetary policies would lead to spillover effects as bond markets face additional pressures.

As the trading nation with the highest concentration of foreign holdings in its Asean bond market, Malaysia is very sensitive to such global changes.

The government had disclosed development spending of RM400 billion as part of Malaysia’s 12th plan to reset the Malaysian economy and encourage foreign capital inflows.

This translates into annual development spending of around RM80 billion, likely financed by debt, pushing for even higher returns.

Will Bank Negara increase the overnight policy rate (OPR) to control inflation? A rise in the OPR would push yields further upward, rapidly increasing the cost of funding.

It may seem too late as Malaysia is gradually reopening its economy after returning to tougher lockdowns and a state of emergency.

The Malaysian economy is still plagued by Covid-19 and faces ever-changing political alliances that threaten long-term development plans.

Meanwhile, central banks and global governments are determined to remove pandemic-era stimulus aid to avoid overheating.

Can Malaysia follow suit so soon when its economy is shaken by the external environment and shaken by its internal economic scars?

The upward trend in yields is expected to continue in the future. A correction to an exaggerated rally in bonds is long overdue as global banks are poised to raise interest rates.

Malaysia cannot escape the fact that the government is more inclined to take on more debt than to generate more income to recover from a crisis.

All signs point to higher borrowing costs for Malaysia as it struggles to keep its economy afloat.

Tan Jack Fong is Senior Analyst at Malaysia Rating Corp Bhd. The opinions expressed here are his own.

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