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Malaysian Bonds Stable Amid US Yield Rise, Local Demand High

Malaysian bonds show resilience to US volatility, supported by central bank and pension funds, with minimal yield fluctuation.

By Athena Xu

5/15, 22:35 EDT

Key Takeaway

  • Malaysian bonds show resilience to US Treasury volatility, with a muted response of 0.28 basis points rise for every one-point US yield increase.
  • The stability is supported by strong demand from local pension funds and strategic decisions by Malaysia's central bank (BNM).
  • BNM's approach includes not signaling immediate rate hikes in response to the Fed, enhancing bond market stability.

Resilience Amidst US Volatility

Malaysian bonds have demonstrated a notable resilience to the volatility of US Treasuries, a characteristic underpinned by the support of the central bank and robust demand from pension funds. This stability is particularly significant given the global financial landscape, where fluctuations in US Treasury yields often have a wide-reaching impact on international bond markets. A Bloomberg analysis, examining data since 2022, reveals that Malaysian bonds have historically shown a muted response to shifts in US Treasury yields. Specifically, for every one-point increase in US yields, Malaysian bonds have only risen by 0.28 basis points, and for a similar downward move, they have fallen by 0.31 basis points. This analysis focused on instances where the 10-year US yield experienced a change of more than 30 basis points over a ten-day period.

Structural and Strategic Support

The underlying reasons for the resilience of Malaysian bonds are twofold. Structurally, the demand for ringgit-denominated notes is significantly bolstered by the presence of large local pension funds, which provides a steady base of support. Strategically, recent decisions by Malaysia's central bank (BNM) have further reinforced this stability. Despite the Federal Reserve's indication of a higher-for-longer interest rate stance in April, BNM did not signal any immediate rate hikes to defend the ringgit. Additionally, Malaysian bonds have benefited from BNM's appeal for ringgit repatriation, a move that has likely contributed to the market's stability by encouraging the return of funds to Malaysia.

Central Bank's Role

The central bank's approach to not signaling rate hikes in response to the Fed's stance is a critical element in understanding the resilience of Malaysian bonds. This decision reflects a broader strategy to manage the currency and bond markets in a way that avoids direct confrontation with global market forces, particularly those emanating from the US. By focusing on measures such as encouraging ringgit repatriation, BNM has been able to provide a level of support to the bond market without resorting to aggressive rate adjustments.