Issuance of govt bonds expected to jump to RM90bil http://biz.thestar.com.my/news/story.asp?file=/2009/4/20/business/372...

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News Monday April 20, 2009

Market Watch
Bursa Malaysia Issuance of govt bonds
My Portfolio
Exchange Rates expected to jump to RM90bil
Unit Trusts
Market Intelligence By YAP LENG KUEN
IPO Watch
Company Ratings
Bonus & Dividends IT looks like a bumper crop is coming into the bond market.
Financial Results
Share Buybacks The issuance of government bonds is expected to leapfrog by 80% this
Changes in Shareholdings year to a gross amount of RM90bil.
Broker's Call
Eye on Stocks Even with a total of RM36.1bil maturing this year,
Supportline
the net issuance is still high at about RM54bil,
Stock Watch
according to statistics from Bond Pricing Agency
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Malaysia Sdn Bhd (BPAM).
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RM45bil compared with RM29.4bil last year.
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Meor Amir Meor Ayub ...
there will be demand, but Oil below US$46, lowest in more than a month
the million-dollar question is
Up to April, the outstanding amount of Maybank, PNB launch online facility for ASB investors
at what price? government conventional and Islamic bonds Support Line
Turf club forfeits RM4.5mil from PGCC developer
came up to RM261bil.
Talisman in US$1.6bil oil production venture

Including the outstanding amount of government-guaranteed bonds of

RM32bil, the total outstanding from the government sector is RM293bil. Business Links

“Since government bonds are already more than half of the total bonds
outstanding in the market, the increase in the supply of Malaysian
Government Securities (MGS) and government-guaranteed bonds will
further skew the overall credit concentration towards sovereign risk (in
comparison, rated private debt securities oustanding is about RM210bil),’’
said BPAM CEO Meor Amri Meor Ayob.

Last year, issuance of government bonds was RM52.5bil. Up to April, the

Government had issued RM25.5bil.

“The market is expecting an increase of more

than 80% in new government issues to
pump-prime the economy and support the mini
budget. Latest Jobs from Star-Jobs

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“There will be demand, but the million-dollar Technician Marketing Manager
question is at what price? That is something the Sales Coordinator Cum Admin Restaurant Manager
Assistant Clerk Of Works
market will have to decide at that point in time,’’
Simon Ng, ... this expected Microbiologist Aircraft Mechanic
higher supply of said Simon Ng, head of pricing at BPAM. Technical Sales Executive
government bonds could
have an adverse impact on
the yields of the bonds The liquidity and size of market is available in
Malaysia. For every auction of government
bonds, the principal dealers representing clients that may be insurance
companies or other banks, are obliged to put in a bid.

“No matter what happens, all government bonds will be taken up,’’ Ng, a
former bond dealer himself, said.

However, when it comes to pricing, a host of factors can come into play.
The bond market is a professional market where every institution employs
armies of analysts to comb through variables that can affect the price.
Weather can be one of these factors.

The overnight policy rate (OPR) is the major determinant in the pricing of

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Issuance of govt bonds expected to jump to RM90bil http://biz.thestar.com.my/news/story.asp?file=/2009/4/20/business/372...

MGS.

“In the coming few months, this will be the main determinant to price MGS.
This expected higher supply of government bonds could have an adverse
impact on the yields of the bonds,’’ said Ng.

So is there a likelihood that the government would further lower OPR to

lessen the costs of such large issuances?

At this point in time, that would be hard to crystal ball. One leading
indicator, said Ng, could be how interest rate swaps (IRS) – the borrowing
and lending swap rates for banks – were trending MGS rates.

At one point, IRS rates were lower than those for MGS, indicating the
market’s expectation of a cut in OPR.

“If one refers to the bond index performance for the last one year, returns
generated by government bonds were higher than those from PDS,’’ said
Meor Amri.

In the case of conventional corporate bonds, the returns are consistently

high but the rate of return (as reflected by the slope) is higher for
conventional government bonds.

“So investors need to know when to sell and take advantage of good
prices.

“They must also know the risk reward relationship, how much their fund is
invested in government, corporate and Islamic bonds,’’ Meor Amri said,
adding that investors should also find out about the constituent issuers
and risks, going forward.

It is, therefore, very important to read the prospectus and make decisions
on known facts.

Statistics show that conventional bonds have performed better than

Islamic ones. The bulk of the issuance by independent power producers,

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Issuance of govt bonds expected to jump to RM90bil http://biz.thestar.com.my/news/story.asp?file=/2009/4/20/business/372...

which were hit by a sudden windfall tax last year, was Islamic bonds.

IPP bonds became a negative sector, however, Islamic bonds have their
own appeal as Islamic banks and funds like Lembaga Tabung Haji have to
invest in syariah-compliant issues.

In the aftermath of the global banking crisis, it is crucial for the ordinary
man, even if he is not an investor in a bond fund, to realise the
significance of the debt markets. As investors in general become more
risk averse, they tend to park more of their money in higher grade bonds
and government securities.

“The debt markets in Malaysia are trading at two to three times higher
than equities in terms of market value, with the bond market carrying
about RM600bil in value. In fact, it is approximately close to the size of
the equity market.

“Based on the performance of the BPAM All Bond Index vis-à-vis the KL
Composite Index, when the equity markets collapsed last year, the bond
market went up. In Malaysia, this was despite the announcement of the
fuel price hike, the collapse of (the 120-year-old) Lehman Brothers and
IPP issues,” said Meor Amri.

Hence, this is a sector not to be taken lightly. More efforts are required by
all parties concerned to demystify a lot of the technicalities so as to
increase its relevance to all caring citizens.

For Bank Negara statements click here

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