KUALA LUMPUR, Oct 28 (Reuters) - Malaysian bond yields fellto their lowest in four months on Monday, driven by sustainedbids from domestic and foreign investors after the governmentunveiled a fiscally conservative budget late last week.
Five-year bonds fell 10 basis points to 3.34 percent, takingthe drop since the end of August to 40 basis points and theyield to levels last seen early in July.
While official data on foreign bond buying is available onlyfor August, analysts said anecdotal evidence of improved demandfor longer-dated bonds and the resultant flattening of the yieldcurve suggested foreigners were back.
Foreigners held nearly 32 percent of outstanding Malaysianbonds at the peak in July this year, before the fear of earlypolicy tightening by the Federal Reserve caused them to sell outof Malaysian and other emerging market bonds.
"The curve's flattened quite a bit," said Winson Phoon,fixed income analyst at Maybank. "Yields have dropped especiallyat the longer end. The demand is a combination of both local andforeign investors."
The spread between 5-year and one-year bonds is 41 basispoints (bps) compared with 51 basis points two weeks ago. Thespread between 10-year and one-year bonds has also narrowed, to65 basis points from 83 basis points two weeks ago.
Nik Mukharriz, a fixed income analyst at CIMB, said thebuying was part of a regional trend. But, in Malaysia's case, itwas helped by the 2014 annual government budget which seeks toimpose fiscal discipline, he said.
"The investors seem happy with the budget. That's added todemand."
Malaysia moved to allay concerns over the country'sfast-rising debt on Friday, announcing a new consumption tax ata surprisingly high rate, abolishing subsidies on sugar andraising property taxes to dampen a surge in home prices. Theannouncement of the 6 percent goods and services tax that kicksoff in April 2015 also allayed fears of an inflationary spike intaxes next year.
Malaysian central bank data showed that foreigners held125.51 billion ringgit ($39.3 billion) of bonds (MGS) at the endof August, compared with 125.54 billion ringgit at end-July anda peak of 144.98 billion ringgit in April.
Analysts, however, warned that renewed foreign interest inMalaysian bonds could wane since the Fed's decision to stand paton its bond buying programme in September signalled a moregradual tapering.
The likelihood was also low that the ringgit, alreadyup 6.3 percent in two months, could rally any further and add tothe yield foreigners get on their Malaysian assets, they said.
The budget announcement of a GST would appease ratingagencies worried about Malaysia's massive sovereign debt, thusstaving off the risk of a ratings downgrade, BofA Merrill Lynchanalyst Claudio Piron said in a note. Malaysia has one of Asia'shighest government debt levels, at 52.5 percent of GDP in 2012.
"That said, with MGS having already done well into thebudget, we would be nimble once the momentum stalls," Pironadded.
(Reporting by Siva Sithraputhran; Editing by Jacqueline Wong)
- basis points