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Malaysia Bonds to Fall; Pay Swap as Growth Quickens, MARC Says

Malaysia’s 10-year bonds are likely to decline, pushing their yield to the highest level since March, as faster economic growth fans inflation, according to Malaysian Rating Corp.

Yields on benchmark November 2019 notes are set to rise 33 basis points by year-end as Asia leads the recovery from a global recession. Malaysia’s economic growth accelerated to a decade-high 10.1 percent in the first quarter of 2010 and Malaysian Rating, known as MARC, predicts a rate of 6.8 percent for the year. That’s more optimistic than the government’s projection for gross domestic product to increase as much as 5.5 percent, following a 1.7 percent drop in 2009.

“Under a sustained and moderate recovery scenario, we deem the 10-year yields as being too low,” Wan Murezani Mohamad, a senior fixed-income analyst at the nation’s second-biggest ratings company, said in a phone interview today from Kuala Lumpur. “Investors can benefit with paid swap positions as we expect market rates to increase across the board.”

Local-currency government bonds have gained in 12 of the last 13 months, handing investors a 5.6 percent return in that period, according to an index compiled by HSBC Holdings Plc. The ringgit has strengthened 8.1 percent since the start of 2010, Asia’s best performance, and two days ago reached a two-year high of 3.15 per dollar. It was little changed from yesterday at 3.169 as of 1:50 p.m. in Kuala Lumpur.

The yield on the 4.378 percent note due November 2019 fell one basis point from yesterday to 3.87 percent in Kuala Lumpur, according to Bursa Malaysia. It will increase to between 4.2 percent and 4.4 percent by December, Wan predicted.

Fund Inflows

The forecast is based on the gap between bond yields and the inflation rate during previous economic recoveries in 1997, 2001 and 2009, which averaged 230 basis points, he said.

The rating company forecast consumer prices will climb by an average 2.4 percent in 2010, following 0.6 percent inflation in 2009. While that implies 10-year yields may reach 4.7 percent, MARC predicts the prospect of ringgit appreciation will attract foreign buyers and help temper any bond-market selloff.

Global funds owned 96.1 billion ringgit ($30 billion) of ringgit-denominated debt at the end of June, the highest total since July 2008, according to central bank data. They held 59 billion ringgit of government bonds, the most since records began in 1970.

Malaysia’s 10-year interest-rate swap was at 4.22 percent, according to Bloomberg data. That’s 35 basis points more than similar-maturity government debt and compares with a one-year low of three basis points on May 21.

Bond prices may drop as the government pares fuel and food subsidies to rein in the budget deficit, Wan said.

Prime Minister Najib Razak on July 16 raised prices of retail gasoline and sugar prices to save the government 750 million ringgit. His administration plans to narrow the deficit to 2.8 percent of GDP by 2015, from an estimated 5.3 percent this year.

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