Posted Date: January 23, 2020

Yields on local govvies ended 2019 significantly lower compared to the preceding year with Malaysian Government Securities (MGS) taking the lead. The decline in yields was mainly driven by easing monetary policies adopted by global central banks against the backdrop of a sluggish global economic outlook. In addition, Bank Negara Malaysia (BNM) had lowered the overnight policy rate to 3.00% in 2019 and again to 2.75% in January 2020 (2018: 3.25%). Meanwhile, the statutory reserve requirement ratio was reduced to 3.00% in 2019 (2018: 3.50%), boosting the appeal for local govvies.

After falling to multi-year lows in 2019, we expect yields on govvies to be rangebound, almost similar to the levels seen in 2H2019. Yields would be suppressed by Malaysia's tepid inflation growth, increasingly dovish global central banks and the renewed strength of the ringgit. However, MARC believes that MGS yields are unlikely to fall below their 2019 levels due to several downside risks that still remain.

Notwithstanding this, we remain cautious about the possibility of the exclusion of Malaysian bonds by FTSE Russell from its World Government Bond Index (WGBI) in its upcoming review in March 2020 or later. Such an event could push up MGS yields given that the proportion of foreign holdings of local bonds had already risen in recent months. Adding to this, uncertainties over future US-China trade deals continue to affect investor sentiment. As such, MARC foresees the average yield on the 10y MGS to be around 3.0% to 3.5% in 1H2020.

In the primary market, MARC expects the gross issuance of MGS/Government Investment Issues (GII) to come in at between RM110.0 billion and RM120.0 billion. MARC's forecast is based on the government's projection of a federal government budget deficit of RM51.7 billion and an expected redemption value of RM70.7 billion in 2020.

Bidding interest would continue to stay strong for the upcoming MGS/GII auctions in 2020. We expect the current low yield levels and ample supply of long-dated GII papers to continue attracting strong interest from investors.

For the corporate bonds segment, MARC is projecting a gross issuance of between RM110.0 billion and RM120.0 billion. MARC's latest projection is premised on expectations of the current accommodative monetary policy stance adopted by BNM, the higher private investment growth expected for 2020 as well as the current low-yield environment.

Foreign appetite for local bonds improved in 2019 as reflected in their holdings which increased by RM19.9 billion to RM204.7 billion, the highest level recorded since 2012, in stark contrast to a net foreign outflow of RM21.9 billion in 2018. Going into 2020, MARC is of the view that the level of foreign holdings would be modest due to several key factors such as the possibility of the exclusion of Malaysian government bonds from FTSE Russell's WGBI and Malaysia's economy expanding below its growth trend in 2020.

Tan Jack Fong, +603-2717 2958/ jackfong@marc.com.my;
Lee Si Xin, +603-2717 2942/ sixin@marc.com.my;
Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my.