AmBank: Malaysian bonds to rally after selldown

KUALA LUMPUR: Malaysia’s sovereign bonds will rally in the next three months, spurred by demand from local insurers and pension funds, and an accommodative interest-rate policy, according to the nation’s top debt arranger.

The yield on the 10-year notes may fall to as low as 3.85% by July, said Jamzidi Khalid, executive vice-president for global markets at AmBank Group, as purchases by domestic funds help offset a bond sell-off that has seen foreign investors pull more than US$14bil in the last five months. The 10-year yield was at 4.08% yesterday.

“There’s a big pool of money waiting to be invested,” Jamzidi said in an interview. “The demand clearly outweighs the supply, especially in the long-dated space.”

Benchmark Malaysian bonds are rallying in 2017 after falling for two years, as investors shift focus to the nation’s improving current-account surplus and trade outlook. The ringgit has jumped to a five-month high and is Asia’s best currency in April, as policy makers take steps to restore confidence following a clampdown on offshore non-deliverable forwards.

AmBank sees a 30% chance of Bank Negara tightening policy in the fourth quarter if growth indicators pick up, Jamzidi said, adding however that the pace of increases would not be as aggressive as the Federal Reserve’s. While inflation in the South-East nation quickened to the highest in more than eight years in March, a central bank official said there was no evidence that price pressures are spreading more broadly in the economy.

“Yields will be supported by domestic institutional funds,” Julia Goh, an economist with United Overseas Bank Ltd, wrote in an April 10 report, adding that holdings of Federal Government securities by the Employees Provident Fund, rose RM4.1bil in January, likely absorbing the foreign selloff.

The ringgit touched a five-month high of 4.3555 per dollar yesterday, as demand for riskier assets picked up after the outcome of the first round of the French presidential election. It is up 1.6% in April.

The currency slumped 6.6% between October and March, the biggest loss in Asia ex-Japan. The decline came as a broad dollar rally amid the election of US president Donald Trump in November and Malaysia’s clampdown on offshore forwards trading saw overseas funds fleeing the nation’s bonds.

Nikko Asset Management Co has changed its view of Malaysian bonds to “neutral” after earlier cutting holdings. Neuberger Berman Group LLC says the ringgit may be among the region’s better performers in coming months. – Bloomberg