Business

Saturday July 4, 2009

Busy pace seen for government bonds


KUALA LUMPUR: Malaysian Rating Corp Bhd (MARC) expects government bond issuance to remain at a busy pace in the second half of this year.

“Following the announcement of the second stimulus package, the budget deficit for 2009 has also been revised higher to 7.6% from 4.8% of GDP (gross domestic product). This has translated into higher financing needs,” MARC said in a report yesterday.

“We expect MGS (Malaysian Government Securities) and GII (Government Investment Issues) issuance to be RM85bil to RM90bil in 2009, 39% to 48% higher than the level seen in 2008.

“So far the Government has issued RM48.5bil worth of securities, about 55% of our expected range signalling that issuance will be at a busy pace in the second half,” MARC said.

MARC does not think demand consideration would become an issue given the healthy liquidity in the financial system as rapid increases in bond issuances could be readily absorbed by the market.

Based on the balance sheets of banks, excess liquidity is estimated at RM250bil, implying that 34% of bank deposits are investable.

Meanwhile, yields on government securities have been drifting higher across the board since Bank Negara last eased its policy rate in February.

“Given lesser dovishness in its rhetoric, the likelihood of another round of interest rate cut for the remaining months in 2009 is quite slim,” MARC said.

“Going forward, downside risk to economic growth might no longer be the key concern as market sentiment is now solely being driven by supply worries,” it said, adding that supply concerns were going to be a dominant factor in the coming months.

MARC said the five-year MGS was still attractive. It said since ballooning budget deficit took over as a major determinant in yield movement, the five-year sector had underperformed significantly and “looks attractive on the curve.”

“Looking at the 10-year benchmark yield which has climbed in excess of 100 basis points (bps) since the beginning of the year, one can conclude that the supply concern has almost been fully priced, taking into consideration that the Government has reduced the number of auctions for this segment,” it added.

The rating house said with the central bank in an apparent pause mode as well as an expectation of economic recovery in the second half, it viewed that the swap rates were now in a “transition period” to head above conventional yields.

“Against this backdrop, we think fixed-rate payers are expected to benefit in this market.”

Exports have been declining for seven consecutive months while industrial production has been in negative territory over this period.

Based on these variables, MARC reiterated that the “recovery path still looks tricky” but the bond market on the other hand seemed to have priced in a strong recovery.

On the private debt securities (PDS), MARC said the spreads of corporate yields to risk free rate had narrowed from its historical high recorded earlier this year.

“The differential between three-year AA yields against MGS of equivalent maturity which peaked at 240bps in January has narrowed to circa 180bps.

“Going forward, we do not expect spreads to narrow significantly until clearer signs in economic recovery in second half emerge,” MARC said.

It added that spreads were not expected to widen to the level seen in the fourth quarter of 2008 and first quarter this year. Signs of improving confidence had also emerged in the secondary market but still not comparable with pre-crisis trading days, MARC said.

“We reiterate our corporate defaults rate forecast of 4.87% in 2009. Negative rating momentum is taking place at an increased pace but much of this activity do not involve issuers at the high end of the credit curve,” it said.

MARC’s target for PDS issuance in 2009 remained in RM25bil to RM30bil with an upward bias.

  • E-mail this story
  • Print this story