Bond market issuances likely to remain buoyant in H2

PETALING JAYA: The bond market for the second half of the year is expected to remain buoyant with analysts forecasting total issuances of between RM50bil and RM60bil for the year. Bond issuance in the first half amounted to RM21bil.

Industry observers said the outlook for the corporate bonds and sukuk could be dampened if the global economy further softened and the European debt crisis worsened.

Unlike corporate bonds, they said foreign funds would continue be a major driver in the Malaysian Government Securities (MGS) market for the second half of the year underpinned by the stronger local currency and the eurozone debt crisis.

RAM Rating Services Bhd chief executive officer Chong Kwee Siong told StarBiz that with the implementation of projects under the Economic Transformation Programme (ETP) and the 10th Malaysia Plan (10MP), he expected bond issuances to remain buoyant with infrastructure projects and financial institutions playing a significant part.

He said this included funding required for the privatisation of PLUS, construction of new power plants, mass rapid transit project and other merger and acquisition activities.

On the flip side, Chong added that the softening of the global economy and contagion effect of the European sovereign debt crisis could dampen the bond market.

While the rating agency maintains its forecast of RM60bil in total bond issuances for this year, he said actual issuance could be higher than this figure if all the projects under the ETP and 10MP in the pipeline were implemented within this year.

Against a backdrop of strong foreign investors' appetite and surplus liquidity in the domestic market, total issuance of private debt securities (PDS) amounted to more than RM21bil for the first six months, he said, adding that infrastructure projects and financial institutions were the main issuers.

He said strong foreign investors' appetite for ringgit bonds had also driven demand and yields of MGS.

With interest rate gradually inching upwards, Chong said yields at the shorter end may eventually rise although he believes the longer end yield would remain stable. Nonetheless, he said the current bond yields were still conducive for corporates to raise long term funds through the bond market.

Malaysian Rating Corp Bhd fixed income research head Wan Murezani Wan Mohamad expected the corporate bond issuance for this year to be around RM50bil, adding that the effect of foreign funds in the domestic corporate bond market was minimal relative to the government bond market.

“Foreign funds will continue to be a major driver in the government bond market as local currency is likely to remain on a strengthening mode against the greenback at least until the third quarter of the year. However, that is not the case in the PDS market as corporate bonds are not an avenue for foreign funds.

“Foreign funds are coming in on the strengthening ringgit as they need to hold on to liquid asset classes. Despite performing handsomely since early this year, currencies in emerging economies will continue to remain fragile which is the reason why foreigners will only hold liquid assets like MGS.”

The record level of international reserves in Malaysia was a result of a higher inflow of US$26.3bil in the first five months of 2011, surpassing the previous record inflow of US$23.8bil registered over the same period in 2008.

Foreign holdings of MGS continue to hit new highs month after month, and as at end of May 2011, about 33.1% of the outstanding MGS were held by foreigners - the first time the ratio surpassed the 30% mark.

Wan Murezani said MGS issuance for the full year was expected to be in the range of RM86bil to RM88bil, adding that RM51bil had been issued to-date. Heavy inflow of foreign funds witnessed the 10-year MGS yield declined 22 basis points from its peak to 3.92% in the first half of the year.

He said the current level of government bond yields was quite low considering the return of growth in the economy, rising inflationary scenario as well as possibility of another round of interest rate hike by Bank Negara.

He expects the 10-year MGS yield to be in the range of 4.10% to 4.20% by year-end and pointed out that persistent foreign demand would limit the sell-off.

Bond Pricing Agency Malaysia CEO Meor Amri bin Meor Ayob said total bonds had grown by between 16% and 21% in the first half of 2011 over the first half of 2010.