Bursa Malaysia > Bonds

MGS relation to IRS


The MGS market took a breather today as  it had been rallied since last week at the back of strong buying from foreign investors due to their continuous optimism in Malaysia economics and politics.  At the current low and flat yield environment, the local players would be even more cautious as they may foresee that the upside in having long position may not return big reward as compared to the risk to be taken. However few opportunities may still be visible  particularly on spread of on-shore IRS against MGS which currently at wide of 37 bps.  At this juncture, I wouldn’t make any recommendation and the piece I wrote here is more for educational purposes only.

1.   When there is expectation that US economy to recover which may result in better growth and expectation of higher inflation. The onshore IRS will move up first ahead of MGS yield as players would pay fixed to hedge against expectation of rising interest rate, Vice versa when expectation of i/r would move lower the onshore IRS will move lower ahead of MGS as market would received fixed and pay float .

2.   Foreign corporate sometimes tap into the local liquidity issuing MYR bond. They usually swap the MYR proceed to dollar using cross currency swap to eliminate FX and Market risk which would result IRS level to go up as they convert their MYR proceeds from fixed to float.

3.   Local investors sometimes purchase USD denominated bond for their MYR book and they usually hedge FX and market risk trough cross currency swap . This would normally results the IRS level to move lower as they would convert the MYR IRS leg from float to fixed .   

4.   There are cases when the onshore IRS level is much lower than the MGS level and it usually happens when there is a strong call that the BNM will cut policy rate. Although by right the IRS level should be higher than MGS level due to differences in credit quality of the instruments.  Sometimes the demand for IRS which tend to be on cash settlement basis (no principal involve) would be preferred as a platform for traders to materialize their views.

5.   The CPI number remain important to determine the expectation of movement of the policy rate. Lower CPI number would create dovish sentiments on interest rate while higher CPI number would create hawkish sentiments. However there has been event in the past whereby the CPI number came out much lower than expected creating dovish sentiments but BNM remain on hold on the policy rate disappointing some of the investors with dovish view. This event may have send strong signal to players not to over speculate on interest rate movement.

6.   The usual case when u received fixed and pay float would results you to have a positive carry cash flow , ie (You received higher fixed rate as compared to what you pay on klibor floating rate) However you may find and opportunity to have positive carry by paying fixed on short dated tenors when the level is lower than the 6 month klibor rate.   

7.   NDIRS is non deliverable products which traded outside the local markets mainly used by foreign investor to hedge their market risk or make a speculation on movement of the country’s interest rate without taking an FX risk. By right, the NDIRS level should be equivalent to  on shore IRS level eliminating any arbitrage opportunity. However most of the time they do not move in tandem as foreign investors intention in entering NDIRS would not be the same as the local players intention on onshore irs.   

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