Maybank IB notes that almost two thirds of net MGS+GII supply has been front-loaded in 1H24, and domestic demand for Ringgit bonds remains resilient. It added that long durations should continue to be underpinned by local pension funds and life insurance companies, supporting a stay of flat MGS curve at the back end with MGS 10y20y and 10y30y curves at around 20-25bp and 30-35bp respectively.
Credit spreads in the Ringgit corporate bond market are at or near record tight, at 5-10bp for GG and 15-25bp for AAA. With still benign net PDS supply YTD, at +MYR7.7b for total PDS (6M23: MYR12.4b) and –MYR0.2b for GG bonds, some demand will likely go to government bonds instead.
Maybank identifies three Scenarios for OPR vs. Fed Funds Rate: The house expects no change in OPR this year, but indicated previously that it would be open to reassess it views on BNM rate policy for 2H24. It has come up with three scenarios below, giving different combinations of OPR and Fed rate, and the potential implications on MGS yields and curve.
BNM Hold, Fed Cut: This is our baseline expectation. UST yields should fall, while MGS continues to trade low beta vs. 10y UST. A 20-25bp decline in MGS yields seems possible, probably a near parallel downshift, although the extent of the rally will depend on the intensity of Fed easing. The MGS 3y10y curve may flatten a tad to 20-30bp, while 10y30y to remain
stable or steepen slightly to 40bp as we think investors would be reluctant to bid the 30y MGS below 4.00% without an OPR cut.
BNM Hike, Fed Cut: Current domestic macro settings don’t justify additional BNM tightening, but the balance of risks could shift to a hike should GDP growth accelerate to 5-6% YoY on a sustained basis, together with faster banking loan growth and lower unemployment rate. If BNM indeed hikes, it would likely be a one-off 25bp. Timing wise, it is unlikely to happen in July/September, and less likely in November, which means the earliest window in 1H25, though market pricing can move first. In this scenario, we expect the MGS curve to flatten, with a 5-10bp rise at the front end but a 5-15bp decline at the long-end. The MGS 3y10y curve could flatten to 15-25bp. A curve this flat is rare, but happened before in 2006-2007, 2013 and 2019-2020. The MYR IRS curve may react in a similar way, and because it is already quite flat at 7bp for IRS 2y5y and 28bp for IRS 2y10y, additional flattening could invert not fully but some parts of the curve. On 3M KLIBOR, we expect smaller increase than 25bp, as local interbank liquidity conditions may improve on meaningfully narrower rate
differentials and tighten the already wide 3M KLIBOR-OPR spread.
BNM Cut, Fed Cut: This scenario would require aggressive Fed easing, potentially a result of unexpectedly sharp slowdown in the US economy, spilling over to other countries including Malaysia. This is not our base case. But if this happens, MGS yields will likely fall significantly, probably by 25-50bp across the curve.
If both BNM and the Fed hold, a less likely scenario, then the year-end forecast for MGS yields would need to go higher.
MGS Outlook: Maybank maintains its positioning recommendation at mildly bullish, a stance it has held since late-Jan 2023, after reducing from bullish when more opportunities were available like the two rounds of market dislocations in 2022. Near term (<1 month), it expects 10y MGS yield to trade largely in 3.80-3.90%. UST will likely remain the single most important driver of local yield direction, though not significant on beta. It views fiscal consolidation more of a factor that helps limit downside risks to bonds, but with limited scope for positive surprise. And will watch for OPR development, a two-sided risk, as described in the three scenarios.
