Rising bond yields pose short-term risk to banks

PETALING JAYA: With bond yields rising, Malaysian banks face potential short-term risks, says MBSB Research.

Investors are already pricing in the risk. The largest listed bank in Malaysia, Malayan Banking Bhd

, has slumped by over 20% from its year-to-date peak, losing RM31bil in market capitalisation.

The stock closed at RM9.80 yesterday, the lowest in more than nine months.

“Much of the discussion surrounding higher interest rates tends to focus on net interest margins and reinvestment yields,” MBSB Research said in a note.

“While these are genuine positives over the medium term, the immediate challenge is that higher Malaysian Government Securities (MGS) yields can create mark-to-market pressure on investment portfolios.”

The recent move in the 10-year MGS yield towards 4% has been driven primarily by global repricing rather than domestic fundamentals.

As a result, MBSB Research pointed out that Treasury income may become more volatile if bond yields continue to trend higher.

“We continue to view the sector as fundamentally sound, but believe higher yields are unlikely to be an outright positive in the near term.”

In the United States, the benchmark 10-year Treasury yield briefly reached 5.35%, its highest level since 2002, while the 30-year Treasury yield touched fresh 24-year highs.

Stronger oil prices, persistent inflation concerns and expectations of another US Federal Reserve interest rate hike have all contributed to the recent sell-off in global bond markets.

In Malaysia, MGS yields continue to move higher because the market is importing higher global discount rates.

This is despite the fact that Malaysia’s inflation environment remains relatively benign and Bank Negara Malaysia has not signalled aggressive tightening.

“Historically, MGS has rarely been immune when Treasury yields undergo significant repricing, and we do not expect this cycle to be different.”

MBSB Research noted that one consequence of higher bond yields is a renewed focus on cash returns.

Dividend yield, earnings visibility and free-cash-flow generation become increasingly important once investors can earn 4% to 5% from government bonds, it further added.

“In our view, it is likely that investors may favour businesses capable of delivering income and earnings certainty rather than relying solely on a re-rating.

“If higher yields continue to pressure valuations, we will view any market weakness as an opportunity to accumulate quality franchises with visible earnings, reasonable valuations and sustainable dividends,” MBSB Research said.

The research house noted that it continues to retain a constructive stance on the market.

The weakness seen in both the S&P 500 and the FBM KLCI should be viewed as a reminder that higher yields can pressure valuations even when earnings remain intact.

However, it believes the current environment favours rotation rather than outright risk reduction.

“If Treasury yields remain around 5% and MGS yields remain approximately 4%, quality, yield and earnings visibility should continue outperforming duration, momentum and multiple expansion,” the research house said.

“Under such a scenario, domestic anchors tied to Budget 2027 priorities may prove increasingly valuable as investors navigate a world of higher global discount rates,” according to MBSB Research.

The research house added that Budget 2027 represents one of the few domestic catalysts capable of offsetting part of the external uncertainty.

“Should the government accelerate investments in transmission infrastructure, energy-transition projects, industrial parks, digital infrastructure and supply- chain resilience, earnings visibility for selected domestic beneficiaries could improve even if global financial conditions remain tight.”