Ringgit bond market still strong
PETALING JAYA: The ringgit bond market is unlikely to see a slowdown in government bond issuance due to the country’s fiscal needs, but corporate debt issuance could see a slight decline amid a rally interest rates.
MARC Ratings Bhd’s Chief Economist, Firdaos Rosli, said: “Although there has been a slight slowdown in emissions lately, it was nothing out of the ordinary so far. With the will of the government to maintain economic growth goals, the local bond market may not be cause for concern, even though it is recognized that interest rates and bonds have an inverse relationship.
MARC had forecast Malaysian Government Securities (MGS) and Government Investment Issuance (GII) issuance to remain between its projected range of RM170 billion to RM180 billion for 2022, while corporate bonds are expected to be in the lower end of the range projected by the rating agency. from RM100bil to RM110bil for the year.
RAM Rating Services Bhd expects its 2022 projections to remain on track, with MGS and GII issuance around RM165-175 billion, while corporate bond issuance will hold steady. around RM110-120 billion.
The government issued RM163.9 billion of debt in the local market in 2021, while corporate bond issuance amounted to RM114.3 billion.
On corporate bonds, Firdaos said issuance is expected to moderate in an environment less conducive to raising capital.
“However, as Malaysia’s economic recovery remains on track, as well as the revival of some infrastructure projects, we do not expect a significant decline in emissions this year,” he said.
RAM senior economist Woon Khai Jhek did not expect rising interest rates to significantly reduce the volume of corporate issuance this year.
“However, the anticipation of higher future rates may prompt issuers to advance their funding plans to lock in lower rates,” Woon said.
With the resumption of economic activities, he indicated that there would be an increasing need for financing by companies.
According to Woon, the two sectors that dominate the issuance of corporate bonds – financial services and the infrastructure and utilities sectors – will continue to increase their capital base to increase lending and roll out various infrastructure projects, respectively.
On the MGS and GII issues, analysts said the high subsidy bill and rising budget deficit would ensure the government remains active in the debit market.
Bank Negara had raised the overnight policy rate (OPR) by a total of 50 basis points (bps) to 2.25% this year, while the US Federal Reserve (Fed) increased by 150 bps, with An additional 175 bps expected for the rest of the year.
With further rate hikes scheduled for the second half of this year, Firdaos thinks local bond yields can rise further.
“While there may be further turbulence, we believe the rise in government bond yields would not be too large given the critical support from local institutional investors,” he said.
Meanwhile, Woon said foreign investor interest in local debt is expected to be weak in the near term due to the market selloff triggered by the Fed’s aggressive policy tightening.
“This is compounded by the narrowing yield spread between the MGS and US Treasuries, which dampens the appeal of domestic bonds,” Woon said, adding that bond yields are likely to remain under upward pressure in the future. the context of monetary policy tightening globally and domestically.
Commenting on debt quality, Woon said the market’s preference for highly rated bonds is largely driven by demand dynamics in Malaysia.
“A large portion of fixed income investors in Malaysia are financial institutions and insurance companies which generally have a low appetite for risk due to their investment mandates and restrictions,” he said.
Additionally, Firdaos said it would be more difficult for lower-rated issuers to access the bond market, given the higher cost of funding. The two analysts, however, did not expect a significant increase in bond defaults.
It should be noted that there were no corporate bond defaults in 2021.
Did companies take advantage of low interest rates before the increase in the OPR?
Corporate bond issuance in 2021 increased by 9.28% year-on-year to RM114 billion, due to relatively low yields.
At the end of June, total corporate bond issues stood at RM52.5 billion, while MGS and GII issues totaled RM87.5 billion.
Global corporate debt fell for the first time in eight years as rising interest rates led companies to stop issuing new bonds, while the outlook for higher rates pushed many to choose to repay their debt with internal cash flow to alleviate the costs associated with higher rates.
If the trend of repayment versus refinancing continues, net debt could decline further.