Business

Tuesday April 7, 2009

Investors seek govt bonds rather than private firms' bonds

By LAALITHA HUNT


PETALING JAYA: More investors are seen flocking towards Malaysian government securities (MGS) as their risk appetite has waned in view of the global economic uncertainty.

This is because private debt securities (PDS), which are issued by private firms, are perceived to be more risky than government-guaranteed bonds.

In view of the continuing flight-to-safety sentiment among investors, figures also indicated that the issuances in the PDS market had indeed lagged behind that of MGS in the first three months of the year.

Total PDS issued in the period amounted to RM7.5bil compared with RM20bil of MGS.

Liza Mohd Noor

RAM Holdings Bhd chief economist Dr Yeah Kim Leng noted that over the last five years, the value of government bonds issued in the domestic market had increased about 6% annually. In 2008 alone, the total gross issuance of MGS reached RM44.6bil, or RM23.2bil after netting off the amount raised to cover matured issues or redemptions. Yeah expects the gross figure to increase to RM76bil this year.

“About RM22bil of MGS will mature this year and assuming the entire budget deficit of RM54bil projected for 2009 is funded through MGS, we can expect RM76bil of MGS to be issued this year,” he told StarBiz.

MGS is issued with the main purpose of funding the fiscal deficit, that is, to cover the shortfall between the amount of revenue expected by the Government and its planned expenditure.

“In other words, it is a form of borrowing or raising of funds, in this case from the debt capital market,” Yeah said.

In contrast, RAM Rating Services Sdn Bhd chief executive officer Liza Mohd Noor believes that there will not be any crowding-out effect from the increased issuance of MGS going forward due to the ample liquidity in the financial system.

“Moreover, the papers are catered to different segments of investors. Risk-averse investors are attracted to government bonds while sophisticated investors that have the risk appetite and proper risk management system are able to enhance their investment returns from the corporate debt market,” she said.

According to Yeah, yields ranged from 3.5% for five-year MGS to 4.3% for 20-year MGS.

As for corporate bonds, yields were from 4.48% for a five-year AAA paper to 7.53% for a five-year A paper, Yeah added.

Liza added that the lower interest rate environment boded well as investors would reap higher total returns on their bond holdings as bond prices increased. This is because bond prices move inversely proportional to interest rates.

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