Principal Asset Management chief investment officer for Asean fixed income Jesse Liew
PETALING JAYA: The lower volatility in the Malaysian bond market compared to regional bond markets, has set the stage for stronger demand for ringgit bonds in the short term amid rising tensions in the Middle East.
Principal Asset Management chief investment officer for Asean fixed income, Jesse Liew, told StarBiz the Malaysian bond market has attracted interests from both institutional and retail investors, owing to its lower volatility compared with counterparts, notably United States treasuries.
He said this stability is underpinned by the reduced volatility in ringgit interest rate movements, meaning investors have been less impacted by fluctuations in bond prices.
“With capital repatriation from local firms and rising foreign interest in Malaysian risk assets, coupled with developed markets reducing their policy rates at a quicker pace than Malaysia, the local bond market is becoming increasingly attractive,” Liew added.
The combination of a lower budget 2025 deficit and strong gross domestic product (GDP) growth, which broadly translates into increased demand for financial assets, is expected to sustain demand for bonds, thus supporting higher bond prices in the future, he noted.
As fiscal consolidation continues, Budget 2025 has outlined a lower budget deficit to GDP ratio of 3.8% compared with an estimation of 4.3% in 2024.
He said the performance of bond markets is partly influenced by portfolio yields, as well as the monetary policy cycle which can lead to either higher or lower bond prices.
“Our short-term outlook for the fourth quarter of 2024 (4Q24) and in 1Q25 for Malaysia’s fundamentals points to robust economic growth, alongside a stable inflation and employment landscape, supported by a broadly balanced monetary policy stance.
“With monetary policy expected to remain steady, we anticipate that returns in the Malaysian fixed income market will likely align closely with the yield of a bond benchmark, generally ranging between 4% and 5%,” Liew said.
Bond analysts expect the narrowing interest rate differentials between the US fed funds rate and Malaysia’s overnight policy rate (OPR) to be a boon for the ringgit bonds, as foreign funds seek to invest in local bonds due to its attractive yields.
Signals are that more US rate cuts would be in the pipeline.
The Federal Open Market Committee in September lowered its key overnight borrowing rate by a half a percentage point, or 50 basis points, amid signs that inflation was moderating and the labour market was weakening. The OPR has been maintained at 3% by Bank Negara to date.
Meanwhile, RAM Rating Services Bhd cautioned that should tensions in the Middle East remain high and investors retain risk-off sentiments, foreign investor demand for Malaysian bonds may be slightly muted in the near term.
The net foreign inflow into the local bond market in September this year moderated to RM1bil from RM9bil the previous month, largely due to a small RM0.7bil outflow of Malaysian government securities (August 2024: net inflow stood at RM6.2 bil).
The RM2bil inflow of Malaysian Treasury Bills (MTB) and Malaysian Islamic Treasury Bills (MITB) and RM0.3bil of Government Investment Issues helped keep the overall foreign bond flow in positive territory in September.
MTB and MITB are short-term government securities.
Commenting on the Asian bond market, Liew said the market in Asia has shown a strong performance recently. With tight credit spreads for investment-grade (IG) bonds, high-yield (HY) bonds are becoming increasingly compelling as spreads are generally still elevated when compared to long-term historical averages.
IG bonds are corporate and government debt that bond rating agencies deem are very likely to be paid back with interest. HY bonds are debt securities, also known as junk bonds, that are issued by corporations. They can provide a higher yield than investment-grade bonds, but they are also riskier investments.
“The HY bond market, having faced significant challenges in 2021 and 2022, has since stabilised, as evidenced by lower credit spreads. Although HY spreads have begun to revert to their long-term averages, they remain above pre-Covid-19 pandemic levels, offering compelling value.
“With the Chinese government adding fiscal support for its economy on top of the easing monetary policy, the HY sector could continue to outperform in the near term, supported by improved fundamentals.
“A key challenge for all fixed income markets will be if markets adjust expectations for Federal Researve rate cuts to be lower than anticipated, which could impact valuations.
“In this environment, the HY market may present greater opportunities due to its shorter duration compared to IG bonds and its potential through higher yield pickup,” Liew added.
As of July 2024, Principal Financial Group’s global assets under management stood at over US$699bil assets under management worldwide.
In Malaysia, Principal Asset Management Bhd is a joint venture between Principal Financial Group and CIMB Group
Holdings Bhd.
