Highest Real Yield Lures BlackRock to Malaysia: Southeast Asia

Highest Real Yield Lures BlackRock to Malaysia
Employees at Proton Holdings Bhd. work on the Saga vehicle assembly line at the company's factory in Shah Alam, Selangor, Malaysia. Photographer: Goh Seng Chong/Bloomberg

Malaysian bonds had their longest winning streak since September as BlackRock Inc. was attracted by the highest yield in Southeast Asia after accounting for inflation.

A 17-week rally in the nation’s debt helped bring the average yield to 3.44 percent on July 26, the lowest level since February 2009, an HSBC Holdings Plc index shows. Inflation slowed for an eighth month in June to 1.6 percent, the least in Asia, boosting the real yield to a July 2010 high.

Malaysia has refrained from joining countries from China to Brazil in cutting interest rates this year to counter slower global growth, saying consumption and investment still support its economy. The nation has the most scope to cut borrowing costs in Southeast Asia, based on benchmark lending rates minus consumer-price gains, according to data compiled by Bloomberg. Malaysia’s so-called real rate is 1.4 percent, followed by 1.2 percent in Indonesia and 0.95 percent in the Philippines.

“The bonds have room to rally if Bank Negara Malaysia decides to eventually ease interest rates,” Christian Carrillo, a Singapore-based senior rates strategist at BlackRock, the world’s largest money manager which oversees $3.56 trillion, said in a July 27 interview. “We like Malaysian government bond exposure in Asian debt portfolios as this market is likely a beneficiary of foreign inflows.”

Slowing Growth

Southeast Asia’s third-largest economy expanded 4.7 percent in the first three months of 2012 from a year earlier, the least in three quarters, on weaker export growth, official data show. Prime Minister Najib Razak said on July 17 that annual expansion of 5 percent to 6 percent is essential to avoid “many problems”.

Asia’s developing economies may need to ease monetary and fiscal policy further as Europe’s crisis curbs demand for overseas sales, the Asian Development Bank said on July 19.

The Philippines has lowered its benchmark interest rate three times this year, while Indonesia and Thailand have cut once each. Singapore uses the exchange rate rather than borrowing costs to conduct monetary policy.

Foreign funds increased local bond holdings by 9 percent in the first half to 112 billion ringgit ($35.9 billion), according to central bank data.

BlackRock prefers longer-term Malaysian bonds as the yield curve is flattening on speculation global growth will remain sluggish, according to Carrillo. The spread between two- and 20-year notes was 74 basis points on July 26, the least since January 2008.

Taylor Rule

“We prefer holding the 15-year to 20-year sector of the curve as we are not convinced Bank Negara will cut rates quickly,” Carrillo said. The central bank next reviews borrowing costs on Sept. 6.

Deutsche Bank AG, Germany’s biggest lender, has been recommending that clients hold more Malaysian government bonds than the benchmark used to track performance, Sameer Goel, the Singapore-based head of Asian rates and currency strategy at the bank, said in a July 30 interview.

“While our call thus far is for no change in Malaysia’s policy rate, the risk is that if developments in Europe get worse, or if second-half growth in the U.S. disappoints, Bank Negara will need to cut rates at some stage this year,” Goel said.

Applying the so-called Taylor rule, a model developed by Stanford University professor John Taylor to determine a nation’s optimal interest rate based on inflation and output, implies a Malaysian policy rate of 2.50 percent, 50 basis points lower than the current level, Goel said.

‘Curve to Flatten’

“We expect the curve to flatten,” he said. “The best value is probably in the five- to 10-year part of the curve because that’s where you tend to see buying from offshore investors.”

Malaysia’s inflation may be understated because state subsidies keep prices low, said Rajeev De Mello, who manages $7 billion of debt as the Singapore-based head of Asian fixed-income assets at Schroder Investment Management Ltd. The government has set aside 33.2 billion ringgit this year to help keep gasoline, diesel, liquefied petroleum gas and sugar affordable, according to a Finance Ministry report.

“We still want to hold the bonds but you’ll not make huge capital gains in the short term,” De Mello said in an interview yesterday. “Unlike other central banks, Bank Negara is slower in cutting rates.”

Moody’s Investors Service assigns Malaysia an A3 credit rating, its fourth-lowest investment-grade. That’s one level higher than Thailand, three better than Indonesia and five rungs above the Philippines.

‘Relative Safety’

Credit-default swaps on five-year Malaysian government debt fell 32 basis points this year to 114 yesterday, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities should the issuer fail to adhere to debt agreements.

Malaysia is viewed as relatively safe and stable compared with many other emerging markets, according to PineBridge Investments Japan Co., part of a New York-based group that manages about $67 billion of assets.

The ringgit has advanced 1.8 percent against the dollar this year to 3.1178 as of 12:56 p.m. in Kuala Lumpur, the fourth-best performance among Asia’s 11 most-traded currencies, according to data compiled by Bloomberg. India’s rupee was the worst performer, dropping 4.3 percent.

“Compared with emerging-market currencies that have seen quite aggressive sell-offs like India’s rupee, Malaysia offers relative safety,” Kazuya Sugiura, the Tokyo-based president of PineBridge Investments Japan, said in a July 27 interview. “And so it’s chosen as a place to park money under this severe environment.”

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