Move over 1MDB, here comes the “Bond Vigilante”



The 1MDB issue is finally dead.

It did not die as a result of any revelation that disproved the allegations. In fact, contrary to that, the new evidence unearthed by investigators around the globe points to a conspiracy to defraud the Malaysian public through a series of interlinking transactions made by those close to the Prime Minister.

But it is dead because the supposed victim, i.e. the Malaysian public, just does not care. It got “strangled to death.”

The public has more or less fallen into three camps; one group that does not care, one group that cared but don’t care anymore and a third group that will agree with whatever the Government says.

Moreover, the pressures of daily life are itself too much to bear for many citizens. Adding the pressure of 1MDB just adds more emotional pain and frustration without any corresponding benefit. Alas, people have learned just to move on. Rafizi’s decision to publish previously classified material into 1MDB may be a decision he made with high personal consequences but achieves little else.

Interestingly, the Government seems still distracted by the 1MDB and Bersih issue. JASA is still busy organising disinformation sessions to try to convince their audience of conspiracy theories.

However, the Government is not quite out of the woods yet. Because in 1MDB’s place, comes another altogether different risk and threat – the threat of the “Bond Vigilante.”

To many in Malaysia this may come as a complete surprise, but to the baby boomers they will recall back to the time of Bill Clinton’s presidency . From October 1993 to November 1994 US 10-year yields climbed from 5.2% to just over 8.0% fuelled by concerns about federal spending.

Clinton political adviser James Carville said at the time that “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

In the case of Malaysia, this threat comes at a bad time.

This is because years of relative fiscal prudence under previous administrations has been replaced by fiscal laxity. The Government debt, which stood at RM 288 billion just before Mr. Najib Tun Razak became Finance Minister in Sep’08 has skyrocketed by 220% to stand at RM 643 billion. This does not include hundreds of billions of other Government linked Guarantees. In addition to that, the Public Sector overall balance has shifted to a deficit of RM 99 billion for 2015.

From an economic point of view, what is happening is that the Government and the wider Non Financial Public Enterprises (NFPE) like MRT Corp, are spending way in excess of revenues.  Foreign bond investors used to supply the funds to finance this deficit.  The risk is that if they want out, and the bigger risk is that if they decide to do so at the same time.

In honesty, the recent upheaval is not actually Mr Najib’s fault, but rather the upcoming President of the United States, Mr Donald Trump.   Bond investors in the US got spooked when waking up to the prospect of trillions of more US debt hitting the market that will increase supply, drive down prices and drive up yields.  This caused the US 10 Year yield to move to the highest levels seen in this year.

This creates a pressure for holders of Emerging market debt like Malaysia. If the US 10 year yields 2.2500%, will it be still profitable to hold Malaysian 10 year debt that yields 4.500%.  If they think that the Malaysian currency exchange rate volatility, caused in part by dear friend 1MDB, is too much risk to bear, then they will sell and move funds elsewhere. What is worse is that an isolationist and protectionist United States will hurt exports from Asia, leading to a weaker current account balance and adding more currency risk.

We currently have yet to witness a wide spread  revolt by Bond investors. Turnover has increased but is still manageable. But should bond investors decide to head for the exit, any resulting collapse of the exchange rate may cause additional headache to the PM and the country.


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