PETALING JAYA: The Malaysian Rating Corp Bhd (MARC) expects gross issuance of Malaysian Government Securities (MGS) and Government Investment Issues (GII) to come in at around RM110 billion to RM120 billion, 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.
In a statement, the ratings agency said 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,” it said,
MARC noted that yields on government bonds ended 2019 significantly lower compared to the preceding year, mainly driven by easing monetary policies adopted by global central banks against the backdrop of a sluggish global economic outlook.
“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,” it said.
Yesterday, BNM announced a lowering of the Overnight Policy Rate to 2.75% from 3% previously. It also reduced the statutory reserve requirement ratio to 3% in 2019, which will boost the appeal for local government bonds.
It also remains cautious about cautious about the possibility of the exclusion of Malaysian bonds by FTSE Russell from its World Government Bond Index (WGBI) in its upcoming review, as 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,” it said.
For the corporate bonds segment, MARC is projecting a gross issuance of between RM110 billion and RM120 billion, premised on expectations of the current accommodative monetary policy stance adopted by Bank Negara Malaysia (BNM), the higher private investment growth expected for 2020 as well as the current low-yield environment.
MARC noted that 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,” it said.