PETALING JAYA: Malaysian bonds will continue to be in demand this year from investors despite the narrowing yield spreads from higher benchmark interest rates.
Investors will look to the March 20 to March 21 US Federal Open Market Committee meeting as many expect another rate hike. New Fed chair Jeremy Powell has indicated up to four hikes this year.
A rate hike usually means that the spread between the yields of similar-tenor sovereign bonds, such as the 10-year Malaysian Government Securities and 10-year US Treasuries, will narrow. This is because when benchmark interest rates are raised, it signals higher inflation and investors will demand higher yields to hold on to bonds.
As the Malaysian economy adapts to the rising interest rate environment, Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid says volatility in the country’s bond market cannot be ruled out.
“Perhaps, you could see the Malaysian government securities (MGS) yields could move 10 basis points higher in a day, just like the taper tantrum in May 2013, which saw the10-year MGS yields rising up by 26 basis points in just a day,” he noted.
Despite the market volatility from the expected monetary policy tightening, bond analysts expect demand for Malaysian bonds to be sustainable.
They believe that the economy’s strong fundamentals will continue to attract appetite for Malaysian bonds.
“I think capital flows will still favour this region because you are expected to have strong growth economic fundamentals this year.
“Malaysia’s inflation rate of 3% and the current account surplus is positive for this year. Even, I would invest money in this region” MARC Chief Economist Nor Zahidi Alias says.
However, continued strength of the US economy and inflationary pressure may push the Fed to raise interest rates again and this may have an impact on Malaysian bonds because spreads will narrow even more since the market does not expect more rate hikes from Bank Negara.
Independent bond analyst Wan Murezani Wan Mohamad says higher US interest rates next year will narrow the strength of the ringgit against the greenback.
“That may trigger a lot of homework needed to be done by those who are having exposure in our sovereign bond market,” he adds.
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