Trigger for market volatility can come in different ways and shapes, be it uncertainties in central banks’ monetary policy, earnings reports, geopolitical unrest or trade disputes between major economies.
While market participants are rattled by the recent market swings, we seize the occasion through this Idea of The Week, to take a closer look at Malaysian Government Bonds on how individual investors can invest in MGS and share with investors what it can offer.
What is Malaysia Government Securities (MGS)?
MGS is marketable debt instruments issued by the Government of Malaysia in order to raise funds from the domestic capital market to finance the government’s development expenditure and working capital. As such, they represent a promise to pay the holder a set level of interest (known as the coupon) during the lifetime of the bond and return your principal when the debt instrument matures. Coupon payments are made semi-annually and government bonds are usually traded in different maturity categories, normally medium to long term up to 30 years.
To put it simply, if you place RM 10,000 in a MGS bond with a coupon rate of 3.5%, you will get RM 350 each year in the form of 2 coupon payments (for example RM 175 every 6 months) until the MGS bond matures. If you hold the MGS to maturity, you will receive the RM 10,000 face value.
Besides holding the MGS to maturity, investors get to choose to sell MGS before maturity at the prevailing market prices in the secondary market to other investors.
What are The Benefits of MGS?
Stable Stream of Income with No Currency Risk
By investing into MGS, investors get to lock in a fixed rate of return over the tenure of the bond. Coupon payments from MGS bonds generate periodic cash flows before the MGS matures. This may be attractive for investors who are saving for future outlays such as education or retirement, but who also want some periodic income stream in the interim.
Besides that, as MGSs are issuing in local currency, particularly Malaysian Ringgit, investors will not be susceptible to the fluctuation in currency movement by avoiding foreign exchange (FX) exposure.
Lower Risk of Default
As government bonds are always perceived as “risk-free” securities, the risk associated with MGS is generally low. They are often regarded as the safest asset class for the particular country, providing shelter when the equities markets are volatile. MGS is fully backed by the Malaysian government which means one’s principal and interest payments are backed by the full faith and credit of the Malaysian government where default is unlikely. As such, this makes MGS one of the safest instruments investors can invest in MYR bond space.
To give investors a better context, Standard & Poor's credit rating for Malaysia stands at A- with stable outlook while Moody's credit rating for Malaysia was last set at A3 with stable outlook.
Enjoy the Perks of Diversification and Liquidity
Generally, bonds do not move in tandem with equities and provide additional diversification for investors as compared to having just equities across sectors. Diversification across asset classes can provide investors with better risk-adjusted returns than a portfolio with just equities. MGS can help investors to diversify the risks in their investment portfolios and rewards investors with stable return while equity markets have been going through ups and downs as they are less correlated with equity markets.
FIGURE 1: Resilient Performance of 5-year MGS
Additionally, MGS has extremely low liquidity risk as investors can easily exit the position at the prevailing market price. Nevertheless, do note the prevailing market prices for MGS can be higher or lower than the purchase price.
Bonds, as a whole, tends not to fall as far as stocks when the going gets rough, and bonds frequently benefit from financial market turmoil. As such, if investors could not stomach the escalating market volatility, they can consider investing into safest instruments such as government bonds to somehow protect their capital from the equity market downturn.
The most important reason to consider buying bonds is because that’s the right long-term decision for your portfolio based on one’s asset allocation. Remember, asset allocation is more important than market timing.
Unsure about which government bond to invest into? Fret not,
FSM Bond would be able to source for the best available price for investors at a fixed fee that will be disclosed upfront, providing transparency in terms of pricing and potential cost saving for our investors!