Update on the Malaysian Bond market

From The Edge:

THE 3/5 MGS spread has fallen to about 80 basis points (bps) since it peaked at 128 bps on March 12, 2009. However, it is still very high compared with its 5-year simple average of 30 bps or 10-year simple average of 38 bps.

In this paper, we argue that the 3/5 spread will narrow in the next one to two weeks, after which it will widen for a period of three to four months and may even exceed the 128bps high recorded in March.

Chart 1 shows the actual historical 3/5 spread movement of the current MGS benchmarks (MH8/12 and MH4/14) since the former became a benchmark, while Chart 2 shows the movement of the three- and five-year benchmarks’ yields.

3/5 year bond spread

The rest of the article addresses how to trade the bond and upcoming spread, but I'll just note some information which the spread may narrow or widen. Maybank predicts the spread will narrow for a couple of weeks and then widen for a couple of months. Essentially, they are saying that the riskier 5 year bond will still lower in price and produce higher yields.

I tend to agree for this in the longer term outlook of 6-12 months and even more as Malaysia is in the midst of a giant fiscal stimulus which they would finance through issuing bonds. But, we might have a period of flight to more safe assets first and a lot longer than Maybank will be predicting.

At the same time, a lot of people who have made back quite a bit of money are parked on the sidelines waiting for the market to go down. It is possible, the market has more to run up from even this particular high point.

When we do see that, yield spread will probably widen quite a bit for a pop before coming back down for a longer than 1-2 week period, and possibly go back up again a year or two from now. It is too early to call how long the flight to safety will be, from a couple of months to more especially if economic data is weak.