KUALA LUMPUR: Malaysia’s bond market is bracing for a potential reset in the domestic rates narrative as attention pivots to Bank Negara Malaysia’s (BNM) upcoming monetary policy decision on Nov 5.
According to RAM Ratings in its Mid-Week Bond Market Update on Oct 29, market watchers are looking beyond just the baseline interest rate decision, focusing on the central bank’s updated assessment of growth and inflation.
The tone of BNM’s forward guidance is expected to be a critical driver for front-end Malaysian Government Securities (MGS) pricing and expectations for the domestic policy trajectory, said RAM Ratings in the report.
“With the Federal Reserve voting on Oct 28 to keep its benchmark interest rate unchanged in a hawkish hold decision, attention shifts to the October employment report on Nov 6 and CPI on Nov 10.
“These releases will provide an important read on labour-market and inflation conditions, with any upside surprises potentially reviving major upward pressure on US Treasury yields and, by extension, external pressure on MGS,” the rating firm noted.
This anticipation builds against a backdrop of complex global headwinds and tightening external financial conditions.
On Oct 28, the US Federal Reserve opted for a “hawkish hold,” maintaining its benchmark interest rate at 3.75 to 4.00 per cent.
The Fed acknowledged that economic activity remains robust and inflation stays elevated, with two policymakers notably favouring an additional 25-basis-point hike.
Geopolitical risks are also casting a renewed shadow over the rates outlook.
Reports suggesting that the US and Israel may consider renewed strikes on Iran following the US midterm elections have raised the stakes for energy markets.
Any escalation in the Middle East could trigger supply concerns, stoke inflationary pressures, and further complicate the trajectory of global monetary policy.
In the domestic fixed-income space, the MGS yield curve “bear-steepened” over the Oct 21 to 28 period.
Yields on the 5-year to 30-year segment rose between 6.3 and 9.9 bps, led primarily by the 10-year MGS. The 10-year MGS yield rose by 10 bps week-on-week to settle at 4.02 per cent.
In contrast, short-term 6-month to 2-year yields edged lower by 0.4 to 0.8 bps. This long-end sell-off, coupled with relatively anchored short-term yields, suggests that market repricing is heavily concentrated in duration risk rather than near-term domestic policy shifts.
Interestingly, the domestic sell-off was not purely a reaction to US rate movements. While the 10-year MGS yield rose, the 10-year UST yield actually declined by eight bps to 5.05 per cent during the same period.
This divergence effectively narrowed the negative yield differential between the 10-year MGS and UST from -120.6 bps to -102.7 bps.
Although this narrower gap improves the relative yield positioning of MGS, the differential remains wide, leaving Malaysian bonds susceptible to US rate expectations and ringgit volatility.
Foreign fund flows have reflected this cautious broader sentiment. Overall foreign holdings recorded a weekly net outflow of RM0.92 billion for the week ending Oct 21, completely reversing a marginal RM0.03 billion inflow from the previous week.
This outflow was largely driven by heavier selling in government bonds, which saw outflows widen to RM1.64 billion.
Conversely, corporate bonds provided a silver lining, continuing to attract foreign capital with inflows strengthening to RM0.72 billion from RM0.61 billion the prior week, helping to cushion the broader institutional sell-off.