KUALA LUMPUR: Malaysia and Asia bonds still offer real positive yields to investors and remain more attractive compared to global bond yields which are deep in negative territory.
Affin Hwang Asset Management director of fixed income Esther Teo said 2021 will be a decent year for Malaysian fixed income market although it will be a bumpy ride, as the firm have seen a lot of headline news just in the first two weeks of January.
To note, Malaysia's 10-year treasury bond offered a yield of around 4 per cent a decade ago. In 2020, the yield is closer to about 3 per cent and now it is under 2.7 per cent.
"Indeed we have seen global bond yields on a downtrend over the last 10 years. As of end 2020, only 30 per cent of global bonds posted yield of over 1 per cent.
"What this means for long-term investors is that returns on fixed income will be lower compared to historical trend," Esther said in response to the lower yield trend.
"Having said that, Malaysia's bond yield is still attractive from a global perspective, and the ringgit is still undervalued compared to regional peers and on a trade-weighted basis.
"We expect the ringgit bonds to provide returns of 4-5 per cent after a strong performance between 6-8 per cent in the past two years," Esther told The New Straits Times.
Further on the outlook for fixed income, Esther said there are a few factors that will drive the bond market performance in 2021.
The backdrop of lower growth and potential the recent Bank Negara Malaysia (BNM) rate cuts would be supportive of the outlook for Malaysian Government Securities (MGS) yields.
"On the other hand, we do expect a higher net supply of government bonds this year to support the expansionary budget announced in Nov 2020.
"We saw a bond selloff in late 2020 on the back of concerns of higher supply and lower demand from Employees Provident Fund (EPF) which could drive bond yields higher.
"However, we believe that such concerns on EPF withdrawals from i-Lestari, i-Sinar as well as lower members' contribution, which could potentially erode EPF's demand on the domestic bond market, may be overdone," she said.
So far, the take-up rate is lower than earlier anticipated, and the first two MGS/GII auctions saw in January was very healthy bid-cover ratio of over 2x which indicates strong
demand, she said.
"Lastly, we expect a stronger ringgit outlook in 2021 and continued portfolio inflows into Asian bonds in search of higher yields.
"The large domestic liquidity pool is also very supportive of the asset class. We see a lot of savers switching out from the very low deposit rates, which is less that 2 per cent, to bond funds in search of higher returns.
When asked on key challenges for fixed income for 2021, Esther said on the global front, a pre-mature withdrawal of central bank accommodative policies would cause a disorderly selloff in the global bond market.
This could be driven by high inflation or economic recovery being much stronger than expected.
"However, we think this is quite unlikely as we have seen the US Federal Reserve and other major central banks committing to keeping interest rates at current levels for a few years, and to be very cautious to reduce their asset buying program in 2021," she said.
The US bond market could be also under some pressure in terms of US Treasury supply if Biden's administration proposed USD$1.9 trillion stimulus package goes through.
This could have some spill over impact to the domestic bond market in terms of higher bond yields, Esther noted.
The other risks to markets are still Covid-19 related, if the resurgence of the coronavirus leads to more shutdown, or the vaccine rollout is much slower than expected.
This could result in a much weaker economic outlook. In this case, corporate bonds could be under pressure, she said.
In Malaysia, the main concern is still surrounding the fiscal consolidation plan and potential credit rating downgrade by
Standard & Poor's, after Fitch's downgrade in December.
The Emergency Ordinance could also affect foreign investors' sentiment in the near-term.
"Nonetheless, we think the risks are quite balanced for Malaysia bond yields.
"The search for yields, lower interest rates and ample domestic liquidity would provide support to any potential selloff from the risks highlighted above," she said.
As an asset class, Esther said fixed income remains an essential component in any investor's portfolio especially
with volatility here to stay.
Bonds play a valuable role by providing a measure of stability as well as predictability in returns through regular income streams.
Drawdowns in bond prices are also less severe compared to drawdown in equities by providing an anchor to one's portfolio and ensure capital preservation, she said.
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