Central banks’ dovish stance to weigh on Malaysian bond yields

PETALING JAYA: Domestic bond yields continue to face downward pressure from the prospect of a low global interest rate environment and consequent search for yield, according to RAM Ratings.

The rating agency highlighted that over the past few months, a number of central banks have lowered their policy rates, which have tilted investors’ interest rate expectations downwards.

“As widely anticipated, the Fed had cut its policy rate band by 25 bps on 31 July 2019, albeit assuring investors that the cut does not mark the beginning of an easing cycle.

“Nevertheless, the market has so far priced in another rate cut in September amid global growth concerns,” it said in a statement today.

RAM said government bond issuance activity stayed robust in July with total Malaysian Government Securities and Government Investment Issue of RM10.5 billion against RM8 billion recorded in June.

Bid-to-cover ratios at government auctions are consistent with the robust demand seen in July, with all issues that were up for tendering achieving a ratio of above two times.

RAM said the shift in the interest rate landscape had sparked a renewed hunt for yields among foreign investors.

“Increased demand for higher-yielding bonds had led to a net inflow of RM5.7 billion into the Malaysian bond market in July versus RM6.6 billion in June.”

As a result, it led to a broad-based retreat in yields across the maturity spectrum and rating bands in July.

“We do not envisage this downward pressure to subside in August as investors remain on the lookout for more rate cuts by the Fed next month,” said the rating agency.

However, the prospect of a global growth slowdown and the fear of a looming recession signalled by an inverted US treasury yield curve, has the potential to dampen investor appetite for emerging market assets.

But, RAM said, the impact on Malaysia so far has been largely confined to the domestic equity market.

It noted that the FTSE Bursa Malaysia Composite Index has been on a downward trend since the start of July, while demand for fixed-income instruments led to a bond price rally during the month.

“Prevailing uncertainties and growing concerns over global growth momentum pave a path for further loosening of global liquidity conditions going forward. The hunt for yield in the emerging market assets will continue so long as an attractive yield differential is maintained, thus providing a counter to potential

rationalisation of passive investor flows in the market,” said RAM head of research Kristina Fong.

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