Malaysian Bonds Turn Corner on Peak-Rate Bets, Loss Protection

THE tide looks to be turning for Malaysia’s bonds. After struggling since the start of last year, the securities have rebounded over the past two months and look set to make further gains in 2023.

There are a growing number of positives for ringgit-based debt: markets are anticipating central bank interest rates are close to their peak, economic growth is set to slow, and the recent spate of outflows from overseas investors leaves plenty of room for money to return.

Yields are also attractive, and provide plenty of downside protection. The nation’s three-year notes yield more than 3.80%, and that would have to climb by about 130 basis points before investors incur a loss next year on a total-return basis, according to a Bloomberg analysis.

“We maintain a bullish outlook on Malaysian government securities on expectation of growing global macro headwinds and we expect Malaysia’s GDP growth to slow,” said Winson Phoon, head of fixed-income research at Maybank Securities Pte in Singapore. “We forecast a strong 6%-to-8% total return for MYR government bonds in 2023.”

Peak Rates

Malaysia’s central bank has raised its benchmark rate by 1 percentage point since May to 2.75% in an effort to combat inflation. While further tightening is expected, there’s growing speculation the terminal rate isn’t too far away, and that will be a positive for holders of the nation’s bonds.

The overnight policy rate will top out at 3.25%, according to the median estimate of economists surveyed by Bloomberg. Ringgit swaps are pricing in only another 35 basis points of rate increases over the next six months.

The benchmark rate is likely to peak at 3% as further hikes will face a higher bar amid a buildup in macro headwinds, Maybank Securities said in a research note last week.

Slowing Growth

Bonds may also prosper as the economy slows. The nation’s gross domestic product will expand by only 4% in 2023, down from a forecast of 8.3% for this year, according to another Bloomberg survey.

“Malaysia’s economy is poised for a sharp deceleration after a big, reopening-driven rebound in 2022,” Tamara Henderson, an economist at Bloomberg Economics in Singapore, wrote in a research note this week. “Support from the release of pent-up demand will wane. Subsidies will need to be more targeted to rein in public debt.”

Attractive Positioning 

Malaysia’s bonds have seen a cumulative US$1.2 billion of outflows over the first 10 months of 2022, compared with an average US$1.1 billion of inflows over the previous five years. That suggests positioning is probably now relatively light, and there is plenty of room for money to return.

Finally, dollar-based investors may get an extra bonus for putting their money into ringgit debt next year given growing speculation the US currency will weaken. The ringgit is forecast to end this year at 4.72 per dollar before appreciating to 4.45 at the end of 2023, according to the median estimate of analysts compiled by Bloomberg. – Bloomberg / pic by TMR FILE