Quantitative Easing

Foreign inflows in bonds should remain positive


PETALING JAYA: The Malaysian bond market, which recorded the 13th consecutive month of positive net foreign capital inflows in May, is likely to experience less inflows of foreign capital in the coming months as inflationary pressures intensify in the United States.

This could cause the US Federal Reserve (Fed) to gradually reduce its quantitative easing (QE) exercise, according to economists and bond analysts.

QE refers to the Fed’s purchase of longer-term bonds or securities to increase the money supply and stimulate lending and investment.

But it can lead to higher inflation. By reducing or decreasing its purchases of bonds by the Fed, this may cause US Treasury yields to increase, thereby attracting foreign investors in emerging markets, including Malaysia, to seek yields or yields. higher in the United States. Bond prices and yields are inversely related.

Malaysian Rating Corp Bhd (MARC), head of economic research Firdaos Rosli (pictured below), said the local bond market is expected to see a net inflow of foreign capital this year, albeit on a smaller scale than the ‘last year.

The moderation in foreign capital inflows over the next few months would likely be due to the potential increase in US Treasury yields (UST) induced by lower Fed expectations and increased inflation expectations, thus lowering real yields for foreign investors.

He told StarBiz: “We don’t expect the local bond market to see a net outflow of foreign capital for 2021 despite expectations of slower than expected economic growth for 2021.

“Positive progress in the country’s vaccination campaign and FTSE Russell’s decision to keep Malaysia in the World Government Bond Index (WGBI) would continue to attract foreign interest in local bonds.

“Put simply, there will be exits but not strong enough to offset the entries in the first half of the year.”

Bond Pricing Agency Malaysia (BPAM) CEO Meor Amri Meor Ayob said it was possible for foreign capital inflows to slow in the coming months if the Fed becomes hawkish by reducing the quantitative easing program more later this year due to increasing inflationary pressure on US soil. .

“The growth factors and obstacles currently depend on the quality of the management of the Covid-19 pandemic in Malaysia. If the pandemic curve soon flattens and the vaccination program intensifies, it will boost bond investor confidence.

“As the United States has demonstrated, once the pandemic is contained and the vaccination rate increases, economic growth will follow,” he said. Meor Amri said failure to flatten the pandemic curve as soon as possible and any delay in national vaccination plans would slow the economic outlook as well as investor sentiment in the bond market.

RAM Rating Services Bhd economist Nadia Mazlan (pictured below) expects foreign capital inflows into Malaysian bonds to remain largely.

This is due to the still favorable yield differentials (between the 10-year UST and 10-year Malaysian government securities (AMS) and the abundance of global liquidity resulting from the quantitative easing measures.

“As we don’t expect policy rate normalization to begin this year, the continued global hunt for yields will likely support foreign capital inflows into the AMS until the end of 2021,” he said. she declared.

That said, she said there could be sporadic episodes of foreign capital outflows due to specific risks, including the recent imposition of MCO 3.0 and a full foreclosure that could impact economic growth more than expected. .

“Until the impact of these risks is assessed as causing permanent impairment, overall investors will always prioritize performance, which will support MGS in the longer term,” noted Nadia.

The local bond market maintained positive net inflows of foreign capital for the 13th consecutive month in May. Net foreign exchange inflows in May were below RM 1.9 billion compared to RM 6.4 billion in April. Foreign AMS holdings reached RM 191.7 billion from RM 189.3 billion in April.

Maybank Kim Eng, Head of Fixed Income Research, Winson Phoon (pictured below), said economic dynamism and the growing breadth and depth of domestic capital markets are key to supporting the expansion Malaysian bond market.

For corporate bonds or the private debt securities (PDS) market, he said one obstacle is the lack of diversity in terms of issuers and investors which implies a wider range of appetite for money. risk.

“We need more issues in the single-A credit sector, and to match them with investors who have such a risk appetite,” he noted.

Phoon Expects Moderate Increase in MGS Yields on Expectations that the Covid-19 Situation in Malaysia would Eventually Be Under Control as Vaccine Rollout Shifts Into High Speed, Along with an Upward Revision of Rates Americans in the second half of the year as The US-led global economic recovery is gaining ground.

Firdaos, however, said that a faster than expected normalization of monetary policy would have a negative impact on local bonds.

This would happen if interest rates in Malaysia were to remain unchanged as other jurisdictions saw higher rates, thus leading to outflows of foreign capital.

The threat of runaway inflation from rising commodity prices would keep local bond investors on edge.

In addition, he added that the local bond market is also vulnerable to capital flight due to the high concentration of foreign holdings.

He said there are several risks that can cast doubt and lead to capital flight from developing economies, including Malaysia.

“The growing politicization of Covid-19 vaccines which restricts global supply and geopolitical tensions with China could prolong economic suffering.

“These factors can rekindle the sense of risk aversion, causing capital flight from developing economies as investors seek safe haven assets. There is also a threat of domestic political instability, as the emergency is expected to end in August, ”Firdaos noted.

Defending a bullish view, Nadia said attractive yield differentials, positive economic outlook and political stability are some of the factors that have drawn global investors to MGS.

As long as the country’s outlook remains stable and the outlook for recovery remains viable despite the current increase in the number of pandemic cases, the Malaysian bond market will continue to attract investors looking for yield.

“The yield differential between the 10-year AMS and the 10-year UST has increased steadily since April 2021, due to larger issuances to fund additional rounds of fiscal stimulus packages.

Higher yields relative to historically low global rates will continue to drive foreign adoption of AMS in the future, ”she said.

Phoon said that in the absence of an idiosyncratic event that could weigh on the risk appetite of foreign investors in ringgit bonds, he expects the 10-year MGS-UST spread to remain stable. in the range of 150 to 200 basis points.

He said: “The rating risk of global rating agency S&P remains a constant concern given its negative outlook on Malaysia, but we do not expect it to have a significant impact on bond yields. even if a negative rating action eventually materializes. “

Regarding issuance, the RAM projects between RM100 and 110 billion of gross corporate bond issuance in 2021, corresponding to the pipeline in 2020 (RM 104.6 billion).

For MGS and Government Investment Issues (GII), the rating agency plans to issue RM155bil-RM165bil in 2021 (2020: RM151.9bil) due to the government’s larger deficit financing needs in the middle the multitude of stimulus measures to fight the pandemic.

The MARC forecast for gross issuance for MGS / GII for this year is estimated to be between RM 160 and 170 billion.

At the same time, he predicts that the gross issuance of corporate bonds will rebound to RM100 billion to RM110 billion in 2021, as in 2018.

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