Malaysia’s three-year sovereign bonds headed for their best week since June as the U.S. government closure spurred speculation the Federal Reserve may delay plans to trim stimulus that has fueled emerging-market inflows.
The U.S. Treasury warned in a report yesterday that a possible default triggered by Congress failing to raise the $16.7 trillion federal debt limit could have catastrophic consequences lasting decades. Malaysia cut fuel subsidies last month and Prime Minister Najib Razak said he will announce more steps in the Oct. 25 budget to address the fiscal deficit.
“The U.S. government shutdown has had an impact on the timing of tapering,” said Vivek Rajpal, a Singapore-based strategist at Nomura Holdings Inc. “Some recent actions in Malaysia such as the fuel price hike suggest the authorities are worried about the fiscal deficit, and hence the market is optimistic that they will be able to take action.”
The yield on the 3.172 percent notes due July 2016 declined eight basis points, or 0.08 percentage point, this week to 3.31 percent as of 10:23 a.m. in Kuala Lumpur, according to data compiled by Bloomberg. That’s the biggest five-day drop since the period ended June 7. The rate was steady today.
The Federal Reserve unexpectedly refrained from reducing stimulus last month, and Atlanta Fed President Dennis Lockhart said yesterday the shortage of economic data due to the government shutdown “would tend to make me somewhat more cautious” about reducing the monthly pace of bond purchases.
Malaysia’s export growth accelerated to a 15-month high of 4.7 percent in August, while the trade surplus widened to 5.1 billion ringgit ($1.6 billion) from 2.9 billion ringgit the previous month, according to the median estimates in Bloomberg surveys of economists before data due at 12:01 p.m. local time today.
Prime Minister Najib increased prices of gasoline and diesel on Sept. 3 to rein in the government’s budget shortfall. The move will help save about 1.1 billion ringgit this year and 3.3 billion ringgit annually in the future by reducing state subsidies, he said.
The ringgit strengthened 1 percent this week to 3.1990 per dollar, according to data compiled by Bloomberg. The currency fell 0.1 percent today. One-month implied volatility, a measure of expected moves in exchange rates used to price options, rose 53 basis points this week and four basis points today to 10.77 percent.
The ringgit has room to strengthen due to improving growth expectations in China in the near term and because of Bank Negara Malaysia’s shift to “a slight hawkish bias”, Citigroup Inc. strategists including Siddharth Mathur wrote in a note yesterday.
To contact the reporter on this story: Liau Y-Sing in Kuala Lumpur at email@example.com