By BLOOMBERG
Malaysia’s central bank looks set to become the first in Southeast Asia to raise its benchmark interest rate this year, spurring a ringgit rally that made the nation’s bonds the region’s top performers.
Bank Negara Malaysia will increase borrowing costs to 3.25% from 3% on July 10, according to 14 of 19 economists surveyed by Bloomberg News. The ringgit gained 0.7% in the past month as global investors pumped money into the country’s assets. Local-currency sovereign notes have returned 0.5% in a month, compared with losses of 0.1%, 0.5% and 0.8% in Indonesia, Thailand and the Philippines respectively, Bloomberg indexes show.
Malaysia is better placed to weather higher oil prices triggered by the sectarian conflict in Iraq because it’s a net exporter of the fuel, supporting the current-account surplus, according to Morgan Stanley. Central banks in Thailand and Indonesia face the need to support economic growth during political transitions, while the Philippines has so far opted to curb cash supply instead of raising its benchmark rate.
“We are constructive on the ringgit because of the more hawkish policies expected from the central bank,” Hakan Aksoy, a fund manager at Pioneer Investments in London that oversees 179 billion euros (RM774.1 billion) globally, said in a July 4 e- mail interview. “Malaysia has some comparative advantage because of the increasing oil prices recently and the other countries may also have some recent disadvantages.”
Election uncertainties
Interest in Indonesian debt has been damped by uncertainties about the outcome of the July 9 presidential election, while Bank of Thailand is likely to maintain a dovish monetary-policy stance, Aksoy said. Thailand is in the throes of military rule following a May coup.
The cost of insuring Malaysian sovereign bonds for five years using credit-default swaps dropped five basis points so far in July to 80, the lowest level since May 2013, CMA prices show. That’s lower than 152 in Indonesia and 106 in Thailand.
Global funds increased holdings of Malaysian government and corporate bonds by RM13.5 billion to an unprecedented RM249 billion in May, the latest available central bank data shows. Overseas investors held 30% of the nation’s sovereign debt, compared with 36% in Indonesia and 16% in Thailand.
Net inflows to bond funds worldwide almost doubled to US$65.4 billion (RM208.1 billion) in the second quarter from the previous three months, data from Cambridge, Massachusetts-based EPFR Global shows. Emerging-market debt funds attracted US$11.5 billion.
Yield pick-up
The ringgit’s gain in the past month compares with a 1.1% advance in the Indonesian rupiah, 0.3% for the Philippine peso and 0.3% for Thailand’s baht, according to data compiled by Bloomberg.
One-month implied volatility in Malaysia’s currency fell to a 17-month low of 4.67% on June 27 and was at 4.98% yesterday. Falling price swings reduce the risk of losses for investors hunting for higher yields.
Malaysia’s 10-year sovereign bonds offer a yield of 4.02%, compared with 2.64% for similar-maturity US Treasuries and 1.27% for German bunds, data compiled by Bloomberg show.
“Malaysian government bonds offer the yield pick-up,” Rajeev De Mello, who manages US$10 billion as the head of Asian fixed income at Schroder Investment Management Ltd in Singapore, said in a July 3 telephone interview. “The currency has been extremely stable so there are less perceptions of currency risk as well.”
‘Moderately bullish’
Morgan Stanley is “moderately bullish” on the ringgit as it sees higher energy prices boosting the current-account surplus, analysts including Hong-Kong based Geoffrey Kendrick wrote in a July 3 report. The excess in the broadest measure of trade reached RM19.8 billion in the first quarter, the widest since 2012.
Crude and petroleum products account for 22% of Malaysia’s overseas shipments, government data show. Total exports rose 16.3% in May from a year earlier, beating the 15.2% advance forecast by economists in a Bloomberg survey, according to a July 4 official report.
Malaysia’s one-year interest-rate swaps climbed 28 basis points in 2014 to 3.67%, 67 basis points above the central bank’s key rate.
Yields on three-year bonds, the nation’s shortest maturity, were last at 3.51% and five-year debt was paying 3.7%. Short-term notes are more sensitive to rate expectations, while longer-term securities tend to reflect the inflation outlook.
Inflation pressure
“More than one rate hike is already priced into the curve,” Rohit Arora, an interest-rate strategist at Barclays Plc in Singapore, said in a July 4 telephone interview. “A key component for foreign investors is the currency and the ringgit has been outperforming. That’s one of the key reasons driving yields lower in the past couple of weeks.”
Bets that Bank Negara Malaysia will raise borrowing costs have intensified after consumer-price increases reached 3.5% in March and February, the fastest pace in almost three years. Inflation eased to 3.2% in May and 3.4% in April. Last month’s data will be released July 16.
Price pressures could accelerate as the government may initiate further fuel-subsidy cuts to meet its fiscal deficit target of 3.5% of gross domestic product in 2014, Australia & New Zealand Banking Group Ltd economists including Singapore-based Glenn Maguire wrote in a July 4 report. The authorities last raised petrol prices in September.
“Further rate hikes can’t be ruled out, so upward pressure will be there in the rates market,” Vivek Rajpal, rates strategist at Nomura Holdings Inc in Singapore, said in a July 4 telephone interview. “When it comes to the back end of the curve, our outlook remains positive. The reason for that is because Malaysia’s fundamentals remain strong.”
— by Liau Y-Sing & Yudith Ho
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