Malaysia is becoming the go-to destination for Asia bond investors like BlackRock Inc., with some looking to profit from possible signs of peak interest rates and others from an attractive yield pickup.
(Bloomberg) — Malaysia is becoming the go-to destination for Asia bond investors like BlackRock Inc., with some looking to profit from possible signs of peak interest rates and others from an attractive yield pickup.
As international investors sought refuge with global banking-sector concerns lingering, they poured $983 million into the nation’s debt last month, the most since January 2022, according to data from Bank Negara Malaysia. And the magnitude of increase in those flows compared with the five-year average was bigger than in the region’s other major economies, based on standard deviation analysis.
“Malaysia bonds look attractive now that inflation has started to show signs of stabilization. It is a country with a strong current account given oil and commodities exposure,” Neeraj Seth, head of Asian credit at BlackRock in Singapore, said in a Bloomberg Television interview. “As the Federal Reserve gets closer to pause, it starts to open up room for the local markets to actually perform as it opens up room for accommodation.”
Malaysian debt is luring investors even though its yields are relatively low: the nation’s three-year benchmark bonds yielded 119 basis points less than equivalent Treasuries at one point in March, the largest deficit since 2007.
But those notes offer a yield pickup if traders short the ringgit against the dollar for hedging via forward contracts, as long as the Malaysian currency doesn’t strengthen. For investors that hedge against the ringgit using three-month currency forwards, three-year government bonds offer a yield of nearly 6%, compared with around 3.3% without any hedging.
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Bank Negara Malaysia has kept monetary policy unchanged at its past two meetings, a sign its key rates may be around terminal levels. Backing that view is the fact that headline inflation slowed to 3.7% from a year earlier in February, from as high as 4.7% in August.
Nonetheless, economists surveyed by Bloomberg are still expecting a final 25-basis-point rate hike to 3% based on their median forecasts. And the central bank has kept the door open for more tightening if needed, Governor Nor Shamsiah Yunus said at the end of March.
If Bank Negara Malaysia does boost rates by another quarter point, shorter-end bonds will still have a buffer for investors that provide them more yield than the policy rate. Malaysia’s three-year yields are nearly 60 basis points above the overnight policy rate, compared with an average gap of 25 basis points in the five years ending 2019 before the Covid pandemic roiled global markets.
There may be further foreign bond inflows in the near term as funds flock to Malaysia as a shelter and pursue attractive hedged returns, “but foreign inflow sentiment remains susceptible to changing US rates narrative,” said Winson Phoon, head of fixed-income research at Maybank Securities Pte in Singapore.
–With assistance from Haslinda Amin.
(Updates with comments from Blackrock.)
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