Bonds provide capital preservation and stable income stream
By CECILIA KOK
However, direct bond investments are currently not as accessible to most retail investors as it is to institutional investors and high net worth individuals. (A high net worth individual is defined by the Securities Commission as one whose total net personal assets exceed RM3mil and has a minimum principal investment value of RM250,000.)
Liza Mohd Nor Most retail investors’ exposure to the bond market is through their investments in unit trusts, where the minimum initial investment required for bond funds is only RM1,000, compared with the minimum amount of RM250,000 required for direct bond investment.
Currently, local institutional investors such as the Employees Provident Fund (EPF) and other financial institutions, including fund management and insurance companies, are the main investors in the Malaysian bond market.
Issued by government bodies such as Bank Negara for the Malaysian Government Securities (MGS) market and private corporations for the Private Debt Securities (PDS) market, bonds are debt instruments that the issuer uses to raise finances for various purposes.
For instance, the government may issue bonds to finance its economic stimulus programmes such as the highly anticipated “mini-budget”, or to refinance its maturing debts. Corporate issuers may also want to refinance their maturing debts through the issuance of new bonds or they may want to raise funds for some of their major projects such as the construction of roads.
When an investor buys a bond, they are essentially lending money to the issuer for a period of time. The due date of the bond refers to its maturity period, which could range from one to 20 years.
As a “lender”, the bondholder will be paid a certain percentage of return called the coupon rate, and throughout the life of the bond, the investor will earn a periodic income based on the coupon rate.
Upon maturity of the bond, the investor will get back his principal amount.
Stable returns
According to CIMB Private Banking head of investment and product development Cho Chuan Yu, more investors are likely going to flock to the bond market in search of safe haven because bond investments provide “the certainty of returns and capital protection”.
Given that bonds are relatively less risky investments compared with equity investments, there is a common misconception that bonds do not give good returns. But the truth is, bond investments can provide good returns in the form of higher yields, particularly with corporate bonds.
This is because corporate bonds are generally more risky than government-guaranteed bonds. In other words, the risk of a corporation defaulting on the bond it issued is higher compared to the risk of a government defaulting on its bond. Hence, investors are paid a higher yield, or interest, for undertaking the riskier bond.
“Corporate bonds give investors a good opportunity to invest in some good-quality companies that offer attractive yields,” Cho explains.
Although there is the risk of the issuer defaulting, such incidences have been insignificant in the Malaysian bond market. This is particularly true for bonds with an A rating and above. (Among the corporate issuers in the Malaysian bond market are Binariang GSM Sdn Bhd, PLUS Bhd, RHB Capital Bhd, Tenaga Bhd and YTL Corp Bhd as well as a foreign issuer, the Export Import Bank of Korea.)
Bonds with good ratings and shorter maturity period can also be easily traded, compared with bonds with poorer ratings and longer maturity periods. In other words, investors do not necessarily have to wait until the maturity period of the bond to dispose of it.
As long as there is demand for the paper, investors can easily sell it back to the market. If the value of the bond is high during the time of disposal, investors can easily make a good profit.
Bond values will increase when interest rates fall, and vice versa. Currently, interest rates are at a cyclical low due to the easing of the monetary policy by the government to help sustain the weakening economy.
RAM Ratings Services Bhd chief executive officer Liza Mohd Nor says the lower interest rate environment is favourable to both issuers and investors in the local bond market.
“It is an opportune time for corporate bond issuers to capitalise on the lower cost of borrowing, while investors could reap higher total returns on their bondholdings as bond prices increase,” she says.
“While the higher credit risk premiums may partly offset the lower interest rates, it may still be a worthwhile exercise for corporations with good credit standing,” Liza adds.
Yields could spike
Citigroup, in its recent report, said the cuts in EPF contribution rates and the widening fiscal deficit were raising supply risk in the Malaysian bond market.
Firstly, the cut in EPF contributions means inflows to EPF would be reduced and hence less funds for investment purposes. Given the fact that EPF is an important source of demand for MGS, this would likely push yields upwards to attract more investors to buy government bonds.
On the other hand, the widening fiscal deficit would deteriorate the ratings of Malaysian bonds, as seen when Fitch Ratings recently revised its outlook on ringgit-denominated debts to “negative” from “stable” previously.
That could potentially lead to further sell-off in foreign holdings of Malaysian bonds, resulting in further weakness in ringgit and cause yields to spike.
As of November last year, foreign investors held around 12% of RM288bil worth of total outstanding government bonds, including bills, compared with 44% of RM255bil in April last year.
Their investments in Malaysian bonds are generally skewed towards government bonds with relatively short maturity periods of less than five years.
Maybank Investment Bank Bhd head of fixed-income research Tan Chee Wee explains that when foreign investors buy Malaysian bonds, they are also looking to make a gain from the ringgit appreciation, besides the bond yields.
So, high yields aside, foreign investors will find more incentive to buy Malaysian bonds when the ringgit is on the appreciating trend against their currencies.
Tan says investors are now looking towards the announcement of the “mini-budget” next month to get a clear indication of how wide the fiscal deficit is going to be.
He foresees that the issuance of Malaysian government bonds this year to be around RM79bil, after taking into consideration a fiscal deficit that could rise to RM37bil and total government debt maturities of RM42bil.
Last year’s fresh issuance of government bonds were estimated to be worth a total of RM60bil. Maybank expects the total gross value of corporate bond issuances this year to decelerate to between RM35bil and RM40bil.
This compares with total gross PDS issuances of RM45.1bil from January to October last year. RAM, on the other hand, projects corporate bond issuance this year to total between RM20bil and RM25bil.
Liza says: “The bond market remains attractive to large corporations that require funding for long-term capital-intensive projects and the financing of the maturing debts”.
Thestar
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