Foreign funds snap up Malaysia bonds on rate bets, yield pickup

MALAYSIA is becoming the go-to destination for Asia bond investors looking to profit from possible signs of peak interest rates and an attractive yield pickup using derivatives.

As international investors sought refuge with global banking-sector concerns lingering, they poured US$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.

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 in Singapore.

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 per cent, compared with around 3.3 per cent without any hedging.

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 per cent from a year earlier in February, from as high as 4.7 per cent in August.

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Nonetheless, economists surveyed by Bloomberg are still expecting a final 25-basis-point rate hike to 3 per cent 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. BLOOMBERG