Offshore funds prefer Malaysian debt amid Treasury volatility

FOREIGN investors are flocking to Malaysian bonds as the debt offers greater shelter from global volatility than regional peers.

Global funds poured $233 million into Malaysian government bonds in April, the largest inflow in five months, in contrast to outflows in Thai and Indonesian bonds. Despite headwinds for the region’s debt such as recent dollar strength and rising Treasury volatility, Malaysian bonds have outperformed Southeast Asian peers, according to a Bloomberg index.

Demand for ringgit notes has risen due to robust onshore liquidity and Bank Negara Malaysia’s reluctance to raise borrowing costs to prop up the currency. The central bank ha refrained from tightening policy to mirror the Federal Reserve’s higher-for-longer stance, and this is positive for bonds.

“While many global investors seem to believe the central bank is ever ready to hike to defend the currency, we believe the public perception is wrong,” wrote Barclays Bank Plc economist Brian Tan in a note last week. “Not a single rate hike or cut since 2010 was driven by the ringgit or the Fed.”

Malaysian bonds historically show less vulnerability to Treasury volatility, only rising by 0.28 basis points for every one gained in US yields, while falling 0.31 basis points for a similar downward move, according to data on US bond moves since 2022, compiled by Bloomberg

Malaysian debt demand is also anchored by a large local investor base, including the domestic pension funds, which shelter the bonds from Treasury swings. Despite the Employees Provident Fund, the nation’s largest pension fund, announcing in April that it will allow depositors an early withdrawal, this does not appear to have impacted primary bond interest.

A three-billion ringgit sale of 2044 bonds on Tuesday, the first auction since the EPF announcement, drew a bid-to-cover of 3.09 times, significantly above the year-to-date average cover of 2.54 times.

The central bank called in early March for state-linked firms to repatriate foreign investment income and to convert it into the local currency. This saw the ringgit pull back from its weakest level against the greenback since 1998. 

“It could be that ringgit bonds offer relatively better stability, as the central bank is unlikely to use rate hikes to defend the currency,” said Winson Phoon, head of fixed-income research at Maybank Securities Pte in Singapore. In comparison, “foreign bond outflows from Indonesia bonds were driven more by risk trimming due to higher sensitivity of rupiah to the then hawkish US rates and risk of BI rate hike.” — BLOOMBERG