TheEdge
KUALA LUMPUR: Bond yields will likely ease in the second half of 2008 as inflationary pressures and a looming global economic downturn take the shine off the domestic bond market, analysts said.
“In the near term, the bond market will remain stable, but we believe bond yields may come under some pressure from rising domestic inflation in the second half of the year,” OSK Investment Bank Bhd director and head of treasury Yeo Chin Tiong told The Edge Financial Daily.
The Malaysian Institute of Economic Research last week projected an inflation rate of 3.2% this year on expectations of petrol subsidy adjustments.
Malaysian Rating Corporation (MARC), however, expects inflationary pressures to have a positive effect on bond yields, arguing that investors will continue pricing in inflation, which would push up yields.
“This will entail rising bond yields in anticipation of higher CPI (consumer price index) readings,” the ratings agency said in its 2008 Bond Market and Ringgit Outlook report.
However, it said rising bond yields and the threat of a slowdown in the global economy would provide conflicting signals and present a dilemma for market participants, and to some extent, the central bank.
Bank Negara Malaysia has advocated an accommodative monetary policy, keeping interest rates at 3.5% to curb inflation and, at the same time, encourage economic growth.
Yield outcome will also hinge on capital outflows. “The yield curve depressed as foreign inflows came in 2007 due to the strengthening ringgit. If there is a reversal of capital outflows this year, it would influence the yield curve,” said MARC senior vice president of fixed income research Adi Asri Baharom.
Stricken yields could dampen investor interest in bonds as an investment vehicle, Yeo said.
“Given the current generally low yield environment, the bond market may not be that attractive compared with other asset classes, as credit risk remains a major issue this year.”
Adi, however, said: “I don’t think interest (in bonds) will die down, we’re seeing a lot of foreign entities buying ringgit bonds because of the high liquidity in the system.”
Rating Agency Malaysia (RAM) chief economist Dr Yeah Kim Leng sees a strong uptake from local pension and savings funds, and insurance and asset management companies seeking to park their funds in long-term assets.
“Long-term funds are looking to diversify into emerging markets due to the weakening US dollar. Middle Eastern investors, sovereign wealth funds from Singapore and investors from China, would potentially be interested,” he said.
The general consensus among analysts is that investors this year are more risk averse; hence targeting ‘‘quality’’ issues revolving around specific companies and projects. “People will continue to want quality issues, namely bonds rated AA and above,” Adi said.
“As long as a company is healthy and has good projects, it will be able to secure funding from the bond market,” said Yeah.
MARC expects a slowdown in private debt security (PDS) issuances to RM45 billion in 2008 from the record RM54 billion done last year.
“We expect between RM40 billion and RM50 billion worth of issues this year, based on strong private finance initiative (PFI) funding requirements and M&A (merger and acquisition) activity continuing among private companies,” said Yeah.
Both MARC and RAM believe interest rates would likely remain stable this year, subject to the state of the global economy.
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