Malaysian government bonds closed steady last week, with benchmark papers shedding 4bps to 6bps. This was despite Bank Negara Malaysia hiking the overnight policy rate (OPR) by 25bps to 2.25% mid-week. There was muted reaction to the hike because bond players had previously priced in at least a 50bps hike in the OPR, by our calculations. In short, the firmer MGS levels owed to bargain-hunting activities post-MPC (monetary policy committee) meeting.

Bank Negara’s rate hike was its first action on interest rates after keeping the OPR unchanged since February 2009. The latest move was seen as a step to “normalise” interest rates, which had been at historic lows since the onset of the economic downturn. From the latest monetary policy statement, the central bank appears committed to adjusting the OPR towards a normalised level, thus preventing the risk of financial imbalances that could undermine the economic recovery process.

This week, bond players have the January industrial production figures to digest. We also await Bank Negara’s announcement of the upcoming 7.5-year MGS sale. The auction size should be RM3.5 billion.
Ringgit IRS rates closed mixed. The short tenure 1-year IRS rose 10bps after the OPR hike, but the 3-year IRS fell 3bps and the longer tenured 5 and 10-year IRS fell more than 10bps.

There was surge in corporate bonds trading mid-week. Volume surged to over RM1.2 billion last Wednesday. We suspect the rise was due to a bulk of mark-to-market trades. Yields ended mixed amidst realignment in various AA-rated names.

Trades remained heavily slanted in the high grade AAA segment, led by names such as Putrajaya, Maxis and Cagamas. However, most of the AAA trades ended range bound, save for names like MISC Sep’10 as it moves closer toward maturity this year (it rose 14bps to 2.54%). We also saw Putrajaya Jul’17 closing at a realigned 4.63% (-12bps), moving below Putrajaya Jan’18 at 4.7% (-5bps).

After a relatively quiet start to the year, we anticipate an increase in corporate bond issuance from this month onwards. With interest rates still hovering at a relatively low base and rising moderately, we expect to see issuers lining up to tap the capital market for expansion and refinancing purposes.

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This article appeared in Capital page of The Edge Malaysia, Issue 796, Mar 8 - 14, 2009.