Local bond market to pick up next year

Written by Joy Lee
Friday, 30 October 2009 11:01

KUALA LUMPUR: The local bond market could get a boost next year as demand is expected to increase with likely re-ratings on corporate earnings and smaller Malaysian Government Securities (MGS) issuance.

“We expect a lot of re-rating on corporate earnings, which is positive for the bond market especially on the credit side.

“You will start to see re-rating on bond issuers rather than downgrades as what we saw previously. So, the trend in the bond market will tweak and turn a bit next year,” AmInvestment Group Bhd’s head of fixed income funds management, Goh Wee Peng, said yesterday.

Speaking after the launch of AmMutual’s latest close-ended bond fund, AmConstant 11/11, Goh said the government’s forecast of a smaller fiscal deficit for 2010 would also mean a smaller issuance of MGS.

During the announcement of the Budget last week, the government had said it would trim fiscal deficit to 5.6% of gross domestic product (GDP) from 7.4% of GDP in 2010, given that the country posted the largest deficit in the region this year.

“They have drastically shrunk deficit to 5.6%, which is out of everyone’s expectations. That is hinting to the market that there will be smaller -than-expected bond issuance for next year, which is very positive for the bond market,” she said.

Goh said the issuance of multi-billion worth of MGS this year caused market players to grow “tired” and most “reserved their bullets” in anticipation of more bonds to come on board in the near term.

Goh. Photo by Chu Juck Seng

“Next year, with the shrink in the deficit, we will likely see about close to RM30 billion reduction in MGS issuance. This will spur a bit of demand. With less MGS issuance, more people will be inclined to buy as they know it is limited,” she said.

AmConstant 11/11, the fifth under the AmConstant series, will be investing mainly in MGS and local bonds carrying a minimum ‘A’ rating by Rating Agency Malaysia Bhd (RAM) during the tenure of the fund, which is two years. The fund would buy and hold short-term local bonds to minimise volatility and interest rate fluctuations while preserving its capital.

Goh noted that FD rates were at an average of 2.5% to 3% and the low interest rate environment was expected to prevail at least till the middle of next year.

Although there was certainty of a global recovery, she said the mixed set of data coming from the US created volatility in the market.

“In Asia, our peers have slowly come out of the woods. But in Malaysia, although we benefited from global recovery, you don’t see a very fast-paced pick-up on export figures or CPI (consumer price index) in the last few months. It is a better-than-expected contraction but it is not a positive trend yet.

“And next year, the government’s forecast GDP is not that rosy to go back to our previous GDP growth of 5% to 6%. So, we don’t think they will take the drastic step of raising interest rates as it would be detrimental to growth.

“They will still let the interest rate stay very accommodative in this low environment for at least two to three quarters to come before all the follow-through data points to a clearer picture of a clear light at the end of the tunnel. But any possibility of a rate hike would be very small and very slow,” she said.


This article appeared in The Edge Financial Daily, October 30, 2009.