“Expectations of ringgit strength attracted foreign bond flows, probably on an FX-unhedged basis to position for FX gains, creating a positive feedback loop,” said Winson Phoon, head of fixed income research at Maybank Securities in Singapore. “The stars have aligned for the ringgit and local bonds.”
Investors are increasingly taking a bullish position on the ringgit in a sign of confidence in the country’s improving economic outlook. The Malaysian currency is up 5.5% against the dollar this quarter. Increased expectations for US interest rate cuts may further attract foreign flows to the domestic bond market.
The rush to Malaysian debt securities is partly helped by light foreign positioning ahead of an expected US Federal Reserve pivot. Global funds’ purchase of bonds over the past 12 months remains at 0.6 standard deviation below the five-year average.
See also: Malaysia refutes US claim on tariffs, doesn’t expect recession
Maybank sees the 10-year Malaysian government yield falling to 3.5% by mid-2025 amid expectations the central bank will maintain the overnight policy rate at 3% through next year. This is supported by waning inflation risks and solid domestic growth prospects. The 10-year benchmark note traded at about 3.75% on Wednesday.
Investors will be on watch for the timing and extent of an eventual cut in subsidies for the nation’s most widely used gasoline for further impact on consumer prices.
“We favor tactically positioning for dollar-ringgit to push below our fair value target of 4.30,” buoyed by an export recovery, unwinding of dollar longs and room for further foreign bonds and stocks inflows, CIMB strategists including Michelle Chia wrote in a note on Monday.
Chart: Bloomberg
