PETALING JAYA: AmInvestment Bank (AmResearch) sees limited impact from the Norwegian sovereign wealth fund’s pullout from emerging market bonds as the exposure level is low and the outflow pace is expected to be gradual.

The Norwegian sovereign wealth fund’s exposure to Malaysian government bonds is US$1.96 billion (RM8 billion), representing 5.3% of total foreign holdings in Malaysian Government Securities (MGS) of RM150.7 billion as at end-March 2019.

AmResearch said in the event the fund decides to withdraw all the RM8 billion from the MGS holdings, it is expected to add about 0.6% upward pressure on the ringgit against the greenback.

“At the same time, the 10-year MGS yields used as the benchmark should rise by 7 basis points under this extreme scenario,” it said in a research note today.

AmResearch believes the outflow of the RM8 billion will more likely be gradual.

“Besides, with a fairly low exposure of around 5.3% with respect to total foreign holdings in our MGS, added with strong liquidity in our bond market, we do not expect any major impact on the yields.”

Norway's sovereign wealth fund will streamline its US$300 billion (RM1.23 trillion) fixed-income portfolio by cutting emerging market bonds from the benchmark index it tracks. Currently worth US$1.05 trillion (RM4.31 trillion), Norway’s Government Pension Fund Global has invested around 30% into fixed income with the balance 70% invested in equities.

In terms of size, Malaysia is the third largest country with exposure to the fund after South Korea and Thailand.

AmResearch highlighted that Malaysia’s bond yields are well supported by healthy macro fundamentals such as steady growth, healthy reserves, current account surplus, low inflation and real money flows.

“We project the 10-year MGS yield at 3.75%-3.80% as our ‘prudent’ levels with room to reach 3.70% if a 25-basis-point Overnight Policy Rate is instituted. In the event there is no rate cut, we expect the 10-year yield to move back to our original levels of 3.90%–4.00%.”

Meanwhile, it expects total gross issuance of MGS/Government Investment Issues (GII) in the primary market for 2019 to hover between RM120 billion and RM125 billion with Q2 2019 gross issuance amounting to RM40 billion.

It foresees a healthy appetite for ringgit corporate bond and sukuk market that saw a total issuance of RM10 billion in 2018.

“In Q1 2019, the total issuance stood at RM25 billion and we project volume to remain healthy with a total issuance of RM80–RM85 billion by the end of the year.”

AmResearch pointed out that the challenges for Malaysia’s bond market in 2019 come mainly from external noises that remain high in the cards.

“Uncertainties surrounding US trade noises with the EU, Japan and India while negotiations with China are still ongoing, Brexit, the US economy outlook, elections (eurozone, India, Indonesia, Thailand and the Philippines) and outlook of the Chinese economy remain high on the table.”

During this period, it expects the level of volatility to swing between 2% and 4%, much depending on the severity of the adverse noises and how long these last. On the domestic side, the focus will be on growth and policy certainties.