BIX ARTICLE
More Fed Hikes Will Further Compress UST-MGS Yield Differentials and Dampen Appeal of Malaysian Bonds — RAM Ratings
Jun 23, 2023
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KUALA LUMPUR (June 22): There will be further yield differential compression between the US Treasury bonds and Malaysian Government Securities (MGS) that will dampen the appeal of Malaysian bonds in the near term, should the US Federal Reserve make further rate hikes while Bank Negara Malaysia keeps the overnight policy rate at 3%, said RAM Rating Services Bhd.
While the Fed decided to leave the interest rate unchanged at June's Federal Open Market Committee meeting, the latest 'dot-plot' projections suggest that committee members anticipate another two 25 basis point hikes this year, RAM noted in a statement Thursday (June 22).
Fed chair Jerome Powell struck a hawkish tone in his congressional testimony on Wednesday, when he told lawmakers that the US central bank was undeterred from its goal to bring inflation down to the 2% target and, despite a recent pause in rate hikes, officials agree that borrowing costs would likely need to move higher.
"With the average 10-year MGS-UST yield spread sitting at a marginal 2.1bps in 1H June (May: 17.7 bps; April 39.6bps), the narrow differential will likely dampen the appeal of Malaysian bonds in the near term," RAM said.
Foreign investors remained net buyers of Malaysian bonds for the fifth successive month in May 2023, charting a net inflow of RM3 billion, double April's RM1.5 billion.
The higher net buyers in May was largely driven by expectations that the Fed would be ending its rate hike cycle, RAM said.
The take-up was primarily for MGS and and Government Investment Issues (GII) after a lacklustre April, it said
Foreign buying of MGS/GII in 1Q 2023 consisted of largely ‘non-sticky’ investors, while ‘sticky’ investors largely sold down, the rating agency added.
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