Business

Tuesday April 7, 2009

Lower yields from risk-free assets over short term


PETALING JAYA: Rating agencies see a downward bias in the yields of Malaysian government securities (MGS) on expectation of lower inflation ahead and more negative economic data globally.

The implication of this to institutions and big-time investors is that even their investments in risk-free assets such as MGS will earn less over the short term.

Yields on government bonds fell to “super low” levels toward the end of December 2008 and have remained below its eight-year average since then, according to Malaysian Rating Corp Bhd vice-president for fixed income research ratings Wan Murezani Wan Mohamad.

“This was because Bank Negara had slashed the overnight policy rate (OPR) and also due to a consistent decline in inflation,” he told StarBiz.

Expectations of a decrease in interest rates would increase bond prices, hence reducing its yields due to its inverse relationship.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng expects yields on MGS to fall further, albeit slightly, depending on the severity of the downturn in the domestic and global economies.

“Given the downward trend in both global and domestic interest rates as well as easing inflationary pressures due to falling commodity prices and weakening demand, yields are expected to fall slightly, more pronounced for short-term yields than longer-term ones,” he said.

Wan Murezani said yields might increase once pump-priming fiscal measures started to “kick in.”

“Although we still see a downward bias in government yields in the near term, it may begin to increase once the positive impact from the front-loaded monetary easing (cuts in OPR) and the expansionary fiscal policy start to kick in, triggering economic recovery, hence making risky assets such as equities relatively attractive,” he said.

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