Bearish stance on bonds and currency

Malaysia’s government bonds were traded weaker with late losses seen along longer tenor papers (more than 10 years) as sentiment in the local market followed the rise in US Treasury yields.

MALAYSIA’S government bonds and the ringgit continued to weaken on a weekly basis.

The past week in global financial markets was marked by a number of important central banks’ monetary policy meetings. Of these, the most being looked at was the US Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) meeting to decide on the US monetary policy, and of which the result triggered a bearish stance on Malaysia’s bonds and currency.

The FOMC decided to keep the federal funds rate target in a range of 5.25% to 5.5%, which is a 22-year high.

This decision was in line with market expectations.

However, the Fed also indicated that there might be one more rate hike this year, and this would depend on the strength of incoming macroeconomic data.

Further to that, the FOMC is also looking at fewer rate cuts in 2024 compared to earlier projections.

Fed chair Jerome Powell remarked that achieving the central bank’s target of US inflation of 2% was still “a long way to go” and the Fed had also raised its projection for 2023 gross domestic product growth to 2.1% (from prior Fed projection of 1%).

On that note, the expectation of one more rate hike in the United States was solidified.

The impact on markets was the continued sell-off in US Treasuries (yields reaching 16-year highs) and a strong boost to the US dollar trading.

The UK government bond market saw bearish movement afterthe Bank of England paused hiking rates, causing the pound to fall.

The central bank decided to keep its policy interest rate at 5.25%, marking the first pause in policy tightening in nearly two years, following several rate hikes.

The decision came after reviewing the inflation and labour data, which suggested that previous rate hikes might have an impact.

Meanwhile, Malaysia’s government bonds were traded weaker with late losses seen along longer tenor papers (more than 10 years) as sentiment in the local market followed the rise in US Treasury yields.

For the week, the 10-year Malaysian Government Securities rose five basis points to 3.98%.

The reopening auction for Malaysian government bonds maturing March 2053 closed with a bid-to-coverage ratio of 1.897 times, for the RM3.5bil public tender size and another RM1.5bil in private placement.

Post-auction, the stock was traded near auction average of 4.45.4% alongside the weak sentiment in the secondary market. The ringgit is set to close the week weaker; the greenback and ringgit pair rose 0.1% to 4.68.7 as of writing.

The ringgit fell in tandem with regional currencies vis-à-vis the strong dollar on the back of the Fed’s policy statement.

On the domestic macroeconomic data, Malaysia’s total trade dropped significantly by 19.8% year-on-year in August, led by an 18.6% decline in exports and 21.2% drop in imports. The trade surplus increased to RM17.3bil.

Manufacturing exports, the largest contributor at 85.4%, decreased by 17.7% due to the decline in electrical and electronic products, petroleum items and chemicals. Headline inflation stagnated at 2% while core inflation, which excludes volatile items and controlled prices, eased to 2.5% year-on-year in August 2023, down from 2.8% in July 2023.

We expect the overnight policy rate to close the year at 3%, given the persistent decline in inflation and the need to support domestic demand in view of declining external trades.

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