Malaysian bonds may have performed best, but a shrinking economy means there is more to come

on Sep 21, 2020
  • Demand has decreased to the minimum this year in the latest bond sales.
  • Investors are betting Bank Negara Malaysia will decrease borrowing costs for the 5th straight meeting.
  • Malaysia’s economy fell to a record low of 17.1% last quarter from a year earlier.

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Malaysian bonds have been top performers in this quarter in the Asian market, thanks to the succession of interest rate cuts. But deflation, diminishing expectations for yet another interest-rate cut, and an uncertain economy mean that there is more to come.

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Senior rates strategist at Australia & New Zealand Banking Group Ltd in Singapore stated in a research note:

We expect bond yields to have seen their lows this year. Malaysia’s political backdrop has also proven to be unstable this year and could raise uncertainties around policy continuity.”

Declining demand 

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Investors are betting that Bank Negara Malaysia will decrease its borrowing costs for the fifth straight meeting – this follows the reduction in its benchmark by 125 basis points this year. It is essential to know that other positives backing the bond rally could involve an increase in foreign inflows.

Concerning the sharp GDP contraction in the Malaysian economy, Brian Tan, a regional economist at Barclays Bank in Singapore, said:

“It’s not clear that there is necessarily a hard floor for Malaysia’s policy rate. The resurgence of Covid-19 in Malaysia’s key export markets such as the US threatens to hamstring external demand.”

Malaysian conventional bond auctions continue to decline, and its benchmark 3-year yields have lowered by almost 40 basis points after decreasing by 75 basis points in the first half of the year.

Before now, Malaysian conventional bonds outpaced the rest of Asia, driven by the central bank’s July 7 meeting to cut interest rates to combat the impact of COVID-19. Now that the Malaysian government decreased its benchmark by 125 basis points this year to a record low of about 1.75%, traders are beginning to lose faith if there is any room left.

Malaysia’s economy fell to a record low of 17.1% last quarter from a year earlier. However, the economic dip surpassed the median forecast of a 10.9% contraction in a Bloomberg survey.

Despite Malaysia’s bleak stance, global funds have been channeled into the country’s debt. It is also essential to know that Malaysia’s total net inflow is US$4 billion in the three months through July, which is almost more than the cumulative outflow of US$4.7 billion three months earlier caused by the COVID-19 pandemic.

Malaysian traders can have faith with the level of bond yields in evolving markets closing in on record lows. Speculated foreign inflows and deflations are positives, as the Central bank aims to offer the best backstop. 

Forthcoming expectations

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According to Marcus Wong, here some observations in Asia’s bond markets: 

  • Thailand will announce second-quarter GDP on Monday; it will give an insight into the full impact of COVID-19.
  • Bank of Indonesia will set its policy verdict on Wednesday, after lowering rates at its two previous meetings.
  • The Philippines will announce balance-of-payments figures on Monday and sell 10-year bonds the following day.
  • Malaysia’s August inflation numbers end on Wednesday; this was after the country experienced deflation in the previous months.
Bond Market World