10-year Malaysian Government Securities yield still attractive, gives room for OPR cut by year-end, says RHB Asset Management

KUALA LUMPUR, July 29 — The 10-year Malaysian Government Securities (MGS) yield, which stands at an attractive level of 2.67 per cent currently, gives ample room for Bank Negara Malaysia (BNM) to cut the Overnight Policy Rate (OPR) by at least another 25 basis points (bps) by year-end, says RHB Asset Management Sdn Bhd (RHBAM).

While believing the current OPR of 1.75 per cent is supportive of the nation’s growth, RHBAM fixed income chief investment officer Michael Chang said further rate cuts are very much contingent on the outlook of the Malaysian economy and the gross domestic product results for the second quarter of 2020, which is due for release on August 12, 2020.

“If the economic data is weak, the capacity for BNM to impose further rate cuts exist, as the real rates for Malaysia is still positive at present,” he told Bernama in an email interview recently.

Commenting on the MGS’ attractiveness in terms of real yield and relative value versus the US Treasury (UST), Chang said RHBAM expected a further rally in yields, although this is dependent on several factors, not least of which is the dampened economic outlook due to the movement control order.

“We expect the 10-year MGS yield to range around 2.50 per cent to 2.80 per cent by year-end, based on the recent OPR reductions.

“And if there are further cuts, there would be a high probability of seeing the 10-year benchmark yield to break below the 2.50 per cent-level, which would be a new historic low,” he said.

On July 29, 2020, the 10-year MGS stood at 2.67 per cent while the 10-year US Treasury dipped to its three-month low of 0.58 per cent on July 28, 2020.

Commenting on this, Chang reiterated that the MGS remained attractive, with the latest figures showing foreign holding in MGS had increased about RM10 billion for two consecutive months since May 2020, while for the Malaysian Government Investment Issues (MGII), foreign holding also rose RM2.4 billion in the same period.

“In our opinion, the 10-year MGS yield is still attractive given that it still yields 200 bps over the 10-year UST,” he said.

According to Chang, the 10-year average spread between the 10-year MGS and 10-year UST was about 154 bps from 2010 to 2020, hence, with the current spread trading at approximately 200 bps, there is definitely value as it is trading cheaper by 46 bps.

“In other words, valuation is still compelling even though the 10-year MGS is at record lows by historical standards, but the ringgit-denominated bond market has deepened extensively over time and gained immense traction over the past 10 to 15 years,” he said.

When comparing the situation during the 1997 Asian financial crisis, Chang said back then, the bond market was not as developed, as most of the funding for infrastructure and development relied on bank loans.

“However, the banking sector, credit intermediation and access to funding in Malaysia have since developed significantly, and the ringgit bond market has definitely deepened as well,” he said.

Additionally, he said the number of institutional and retail players within the local market have also expanded considerably over time.

“More importantly, demand for MGS is also supported by Malaysia’s positive progress in containing the Covid-19 pandemic as compared to other countries in Asia,” he added.

Asked if the recent declining growth of Malaysia’s Consumer Price Index (CPI) would affect investors’ appetite in the Malaysian market moving forward in 2020, Chang opined that the deflationary trend should support local fixed income market as investors need to achieve better returns or income in comparison to the declining fixed deposit rates.

“We also still have attractive real rates. Therefore, we think the local bond market will still be preferred given the dovishness (cut rate by 25 bps) as reflected in the Monetary Policy Committee statement on July 7, 2020 and sufficient liquidity within the local financial system,” he said.

Malaysia’s inflation, which is measured by the CPI, has been in the negative territory since March 2020, with the latest reading declining 1.9 per cent year-on-year in June 2020, weighed down by the drop in the transport component on lower fuel prices. — Bernama

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