RAM Rating Services Bhd senior economist and head of economic research Woon Khai Jhek
PETALING JAYA: The ringgit bond market is poised to strengthen and attract strong net foreign fund inflows this year underpinned by the cut in global interest rates amid financial market volatility in the near term.
RAM Rating Services Bhd senior economist Woon Khai Jhek told StarBiz he expects the local bond market to maintain its momentum and continue to chart an overall net foreign fund inflow this year on the back of falling interest rates globally.
“Foreign demand was somewhat lacklustre in the first half of 2024 with foreign inflows amounting to RM0.9bil, coming off a robust inflow last year (RM23.6bil), amid market jitters and weak sentiment arising from the uncertainties over the timing of the Federal Reserve’s (Fed) rate cuts.
“That said, sentiment is widely expected to turn in the second half of 2024 on an increasingly higher possibility that the Fed will commence its rate cut cycle soon.
“On the back of a softer than expected US inflation print and dovish remarks by the Fed chairman, the market is convinced that the Fed would cut interest rates in September,” he said.
The market-assigned probability of a rate cut in September has been hovering close to 100% since mid-July from around 64% as at end-June, according to CME FedWatch Tool data.
This would help increase investor appetite for riskier emerging market bonds, including Malaysian bonds.
This is already evident from the sharp jump in foreign fund inflow to RM7.8bil last month, compared to the foreign outflow of RM0.6bil in June.
Furthermore, Woon said with Bank Negara’s overnight policy rate widely expected to stay unchanged through this year, interest rate differential between Malaysian government securities (MGS) and US treasuries (UST) should turn even more favourable for local bonds as the US rates start to decline.
OCBC Bank (M) Bhd head of global markets Stantley Tan said the global rate cut cycle is expected to have a spillover effect on the Malaysian bond market. On the other hand, he believes local factors are driving a positive outlook for the ringgit bonds this year.
He said the supply-demand dynamics are favourable due to measures taken to consolidate finances, such as rationalising subsidies for diesel, electricity, and water, noting that this helps to minimise the potential risks to bonds.
“The combination of global easing cycle, narrowing interest differential, strengthening ringgit, improving fundamentals and political stability is likely to sustain demands for Malaysian bonds over the medium term,” Tan said.
Maybank Investment Banking Group head of fixed income research Winson Phoon said the Fed’s action is a crucial driver of ringgit bond performance. A higher market conviction on Fed rate cut and potentially a larger size of cut are bond positive – to both UST and MGS.
“There are increasing signs that US monetary policy is restrictive, and conscious of this, the Federal Open Market Committee is paying greater attention to the downside risks to the jobs market instead of having their eyes solely on inflation.
“We expect ringgit government bonds to have a positive higher total return in 2024 than the long-term average of about 4% per annum,” he added.
Phoon said foreign buying was strong in the final week of July and continued into the first week of August.
“We think a large majority of the recent inflows went to short and mid-tenor MGS and government investment issues to position for ringgit strength on foreign exchange unhedged basis. The Fed’s easing under a US soft-landing scenario is conducive to sustained inflows,” he said.
Meanwhile, MARC Ratings Bhd chief economist Ray Choy said foreign investors have been attracted by the improving performance of the ringgit. On top of that, he said Malaysia’s gross domestic product (GDP) growth in 2024 has so far exceeded expectations.
“Foreign investors have adopted underweight positions in the local bond market relative to regional and global bond indices for some time. This suggests that there is potential for this trend to reverse, partly driven by anticipated US rate cuts and improving growth prospects in Malaysia.
“As an indication of the relatively lower level of foreign ownership in the government bond market over time, it is noteworthy that foreign investors currently hold about a fifth of the market, compared to a historical peak of approximately one-third in 2016,” he said.
Choy said foreign investments tend to be concentrated in the MGS space, as this segment is more liquid and commonly used for index benchmarking purposes.
At present, he sad government bonds are likely to be preferred, as Malaysia’s corporate bond spreads are quite low, meaning investors may not be as well-compensated as compared to the past for taking on credit risk.
HSBC head of Asia-Pacific rates strategy Tan Pin Ru said the upcoming monetary easing in the United States should result in a gradual reallocation of assets towards emerging markets and Asia.
Malaysia is a potential beneficiary of such flows, which should support the performance of local bonds, she said.
She said Malaysia’s government bonds have always stood out for the low volatility nature, particularly the long-dated bonds.
However, she said assuming that the currency continues to strengthen, foreign interest may be stronger for short-dated bonds, than long-dated bonds.
On the potential challenges that may impact the local bond market, Tan said any positive momentum in the data in the Western markets that would cause the Fed to revise its schedule to cut rates or any changes in Malaysia government policy that are deemed to increase the deficit would unavoidably be negative for the bond market.
“Local factors in Malaysia, such as the country’s sovereign rating and domestic economic outlook, are currently positive.
“However, it is important to consider external factors, such as geopolitical and election risks, which could potentially escalate the ongoing trade war between the United States and China and could impact the local bond market,” she said.
Separately, Choy said while the local bond market has remained relatively stable, the MGS have limited room for further gains compared to UST, where the market expects 75 basis points (bps) to 100 bps of rate cuts by the end of 2024.
