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Tuesday, February 11, 2014

US Fed tapering affecting local debt market

Published: Friday February 7, 2014 MYT 12:00:00 AM
Updated: Friday February 7, 2014 MYT 6:47:43 AM
Nor Zahidi says the Fed tapering has already been priced in by the market.
PETALING JAYA: The latest move by the US Federal Reserve (Fed) to taper its bond purchases will slow down local bond issuance this year but will not significantly impact the bond market as a whole unless the reduction of bond purchases is aggressive.

Industry observers said further hikes in bond yields would not solely be due to the Fed’s actions alone but from higher inflationary pressure from the Government’s subsidy rationalisation plan.

Malaysian Rating Corporation Bhd (MARC) chief economist Nor Zahidi Alias toldStarBiz unless the Fed scales down its bond buying programme more aggressively than the current pace of US$10bil per month, it would not significantly impact the bond market as the tapering had already been priced in by the market.

Last month the Fed reduced its asset purchases by US$10bil for the second month in a row, cutting its monthly bond-buying programme to US$65bil beginning this month while leaving its benchmark interest rate near zero.

He said foreign investors with long term investment perspectives would not totally abandon local government papers as they are less influenced by changes in the Fed’s monetary policy stance and tend to focus more on Malaysia’s long-term economic fundamentals.

Notwithstanding this, MARC maintains its view of an upside bias for Malaysian Government Securities (MGS) yields and expects the yield curve to steepen further due to stronger consumer price index (CPI) growth on the back of the resumption of subsidy rationalisation plan and the roll-out of the goods and services tax (GST) in April 2015.

In the primary market, Zahidi said it expected lower MGS issuance of between RM85bil and RM90bil this year on the assumption of the budget deficits of RM37.1bil and RM46.9bil worth of MGS/ Government Investment Issues (GII) projected to mature this year.

As for the private debt securities (PDS), it foresaw total issuance to moderate slightly to between RM65bil and RM75bil this year, slightly lower than RM86bil last year.

He foresaw more downward pressure on the ringgit (against the US dollar) if the Fed continued to trim its bond purchases in the months to come.

Bond Pricing Agency Malaysia CEO Meor Amri Meor Ayob agreed there had been no significant hike in bond yields due to the pricing in of potential tapering as early as May last year.

He agreed that the rising yields were due to rising inflationary pressures as a result of subsidy rationalisation measures undertaken by the government.

As of January 30, the 10-year MGS yield had risen 12 bps to close at 4.22% from 4.1% on Dec 18, while the 10-year Islamic Corporate-AAA yield has increased by 19bps over the same period to close at 4.89%.

The yield of the 10-year US Treasury (UST) started to trend lower in January this year despite the Fed’s tapering of its bond buying programme. This was due to the risk-off sentiment in the market as a result of the currency rout in some of the emerging markets like Turkey, Argentina and South Africa among others, he added.

RAM Rating Services Bhd deputy CEO Promod Dass said he expected this year to be healthy year for the Malaysian bond market with sukuk issuances picking up further steam.

He anticipated the corporate bond market to gain momentum this year driven by the potential of further yield steepening that may spur issuers to lock in their bond programmes, especially in the first half of the year.

“Projects under the Economic Transformation Programme, private financing initiatives for large-scale projects, and further capital-augmentation plans by financial institutions are expected to sustain growth in 2014.

“We thus expect gross corporate bond issuance to come up to about RM90bil to RM95bil this year,” he said.

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