KUALA LUMPUR: Cost of funding for government bonds is not likely to increase in tandem with the 25-basis-point  hike in the overnight policy rate (OPR), as expectations of a rise in key interest rates have been priced into the yield curve earlier, said bond analysts.

CIMB Group Research fixed income head Lum Choong Kuan said theoretically, although funding cost for private debt securities (PDS) might increase to reflect the OPR hike, government bonds were not likely to face a similar situation this time.

“The government bond market seems to have received muted response from investors, as it has already priced in 50 basis points (bps) to 75bps in the yield curve following expectations that the OPR hike would happen this year,” he told The Edge Financial Daily here yesterday.

Interest rates have negative correlation with bond prices. An increase in interest rates will push bond prices down, and yields up.

AmBank Group’s credit research and strategy analyst Karen Wan said yields for government bonds had actually come off recently.

“Post the 25bps hike, the market largely expects a measured rate-hike scenario. In fact, MGS (Malaysian government securities) and IRS (interest rate securities) yields actually dropped post the rate hike, making the environment conducive for corporate borrowers to tap the debt capital market in the near term,” she told The Edge Financial Daily via email yesterday.

Wan added that given that the 25bps hike in key interest rates was a measured increase, it was not likely to shift the supply and demand for bonds.

However, she noted that there would likely be fewer government bonds issued in 2010 given the government’s commitment to reduce the budget deficit, with gross and net issuance of Malaysia government securities or government investment issue (MGS/GII) this year estimated at RM64 billion and RM40.5 billion, respectively.

In 2009, gross MGS/GII gross issuance stood at RM88.5 billion, while net issuance was about RM52 billion.

Meanwhile, for the PDS market, Wan said a larger supply of papers was expected to enter the market this year, with gross issuance estimated to reach about RM60 billion, largely via high-grade papers.

“On the whole, total bond (MGS/GII plus PDS) supply is anticipated to be higher in 2010 as the issuance of PDS potentially outpaces that of government bonds,” she said.

However, Wan said PDS supply would still be manageable while demand would remain healthy mainly due to ample excess liquidity in the system and growing foreign investor appetite for domestic debt, especially when risk appetite gathered momentum amid economic recovery or prospects for a stronger ringgit in view of further rate hikes.      

CIMB’s Lum said both investors and corporates seeking to raise capital via bonds were still cautious about the environment and hence, investors and suppliers have yet to be seen rushing into the debt market.

“Investors are still sticking to high-grade PDS papers instead of going down the credit curve for even higher yields,” he said.

Lum added that so far, for this year, corporations have not provided new debt offerings, and issuance of PDS comprised generally tranches from debt programmes that were already announced.

On government debt paper offerings, Bank Negara Malaysia will auction tomorrow RM3.5 billion of MGS maturing in September 2017, which will be designated as the seven-year benchmark.

AmBank’s Wan said the lack of issuance of PDS in the earlier part of the year was partly due to the festive holidays, while coming into March, both issuers and investors decided to wait and see due to the rate-hike expectation at last week’s monetary policy committee meeting.

An industry observer said although financing rates for debt papers could be higher, it did not necessarily mean fewer companies would raise capital via debt.

“How well the bond market performs also depends on the economic health of a country. Given that the credit environment has improved this year on the back of the country’s GDP (gross domestic product) growth in the fourth quarter of 2009, there will be more willing buyers and sellers,” he said.

Five-year corporate bond yields fell to 4.5% in December 2009 from 4.6% between July and August last year. The industry observer said the yields had stabilised in recent months, as global economic conditions improved at the end of last year.


This article appeared in The Edge Financial Daily, March 10, 2010.