Malaysia debt turns into emerging market haven as Fed hikes near

[KUALA LUMPUR] Investors are flocking to Malaysian bonds as higher oil prices and demand from domestic pension funds turn the nation's debt into a South-east Asian haven.

Overseas investors bought US$1.1 billion of the country's bonds in January, the most in 9 months, while local demand got a boost from institutional investors seeking assurance that only government securities provide. The relentless buying kept the nation's debt insulated from the selloff in US Treasuries, with the correlation between the 10-year benchmarks dropping close to zero, signalling no interdependence.

Foreigners will continue to load up on the Malaysian bonds in the first half of 2022, as ringgit yields have been resilient against rising global rates, said Duncan Tan, a Singapore-based foreign exchange and interest-rate strategist at DBS Group Holdings. A range-bound dollar will also keep the higher Malaysian yields attractive, according to Tan.

Despite the US$4.1 billion foreign bond inflows since 2021, global fund positioning isn't overweight yet, with 12-month inflows only slightly higher than the 5-year average.

Demand from local pension funds is also expected to rise as contributions to the nation's Employees Provident Fund pickup as the effect of the Covid pandemic wanes, according to Michelle Chia, regional head of Treasury & Markets research at CIMB Investment Bank Bhd in Kuala Lumpur.

Pension fund holdings of government debt had risen for 3 straight quarters to RM244 billion (S$78.6 billion) in the 3 months to September, according to the latest available data from the central bank. Global market volatility will continue to drive institutional demand for government haven assets, Chia said.

Another factor supporting Malaysian bonds has been the relatively resilient ringgit, as the oil-exporting nation has been buoyed by crude prices that almost touched US$100 per barrel.

Despite the almost 40 basis-point surge in the 10-year US yield this year, the Malaysian equivalent has risen by less than 10 basis points to 3.68 per cent, with the ringgit only weakening by 0.4 per cent against the dollar over the period. BLOOMBERG