In November, a resurgence in the strength of the ringgit fuelled a rally in Malaysian Government Securities (MGS). The ringgit ended the month at RM4.0910 against the US dollar, its strongest level year-to-date. With foreign buying interest reignited, foreign holdings of MGS surged 4.6% month-on-month to RM160.3 billion (October 2017: RM153.2 billion), equivalent to 44.3% of total outstanding (October 2017: 42.7%). The release of stellar 3Q2017 economic growth data (6.2% year-on-year) also boosted investor interest. Not surprisingly, the bullish sentiment also spilled over into the primary market.
The sustainability of the rally, however, will depend on several headwinds. Factors on the external front include the hawkish tendency of the new US Federal Reserve chair and developments related to the US tax reform bill. Domestically, Bank Negara Malaysia’s monetary policy stance will figure most prominently. The central bank’s statement following the November monetary policy meeting that it may consider reviewing the current degree of monetary accommodation had triggered a temporary sell-off. There will also likely be impact from political developments in the run-up to the forthcoming general elections.
In any case, MARC does not expect the rising prospects of monetary tightening to lead to a significant rise in bond yields. Barring unforeseen circumstances, it is highly unlikely that monetary tightening will, for example, cause the 10-year MGS yield to surpass its highest level attained during the post-US election in November 2016.
In the local corporate bond scene, gross issuance year-to-date (January 2017 – November 2017) surged 28.6% year-on-year to RM109.2 billion, the highest since 2012 on support from improving economic prospects and low interest rates. It remains to be seen whether 2017’s full-year gross issuance will surpass that of 2012 (RM123.8 billion). MARC expects corporate bond issuances to normalise in 2018, given among other things, prospects of higher borrowing costs as monetary tightening proceeds. We expect total corporate bond issuances next year to come in at between RM85.0 billion to RM95.0 billion.
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