A rally in Malaysia’s two-year Islamic bonds lost its key driver after central bank Governor Zeti Akthar Aziz seemed to rule out an interest-rate cut.
Malaysia’s borrowing costs are accommodative and the ringgit is undervalued, Zeti said in Washington at the weekend. Maybank Investment Bank Bhd. said there’s limited room for further declines in short-end yields, after they fell five times faster than those on 10-year notes in 2015. Franklin Templeton Investments Malaysia sees investors switching to longer tenors and forecasts no policy change this year.
“Yields on short-end government sukuk will be volatile because this section of the curve is prone to the expectation of policy changes,” Hanifah Hashim, Kuala Lumpur-based head of Malaysian fixed income and sukuk at Franklin Templeton, which manages $5 billion locally, said by e-mail Monday. “Lengthening duration would be viable.”
Zeti has resisted following a global bout of easing even as the International Monetary Fund joined the government in lowering 2015 Malaysian economic growth forecasts. A report Wednesday may show inflation accelerated in March, before the 6 percent goods and services tax was introduced in April. The ringgit has plunged 11 percent since June due to slumping oil prices, a sovereign downgrade warning from Fitch Ratings and concern a state investment company would default.
The two-year sukuk yield has dropped 28 basis points to 3.34 percent since Feb. 5, nine basis points above Bank Negara Malaysia’s benchmark policy rate, the narrowest since at least 2004. The 10-year yield fell five points to 4 percent, central bank indexes tracking the two securities show. When the rate was last cut in February 2009, to 2 percent from 2.5 percent, the short-term yield slipped to 2.4 percent from 2.8 percent.
While one-year interest-rate swaps have fallen 25 basis points from a December high to 3.63 percent, they aren’t yet signaling an easing. Current conditions will allow the central bank to maintain borrowing costs “at these levels,” Zeti said in Saturday’s interview.
Wednesday’s inflation report will show consumer prices edged up 0.9 percent in March from a year earlier versus February’s five-year low of 0.1 percent, according to a Bloomberg survey. Gains will average 2 percent to 3 percent this year, compared with 3.2 percent in 2014, as lower oil prices will partly offset the GST impact, according to last month’s central bank report.
“On the back of Zeti’s comments, some of the calls for a rate cut will be taken off the table completely or will at least be postponed to very late this year or even early next year,” Winson Phoon, Kuala Lumpur-based fixed-income analyst at Maybank Investment, said by phone Monday. “If that’s so, I do believe that there’s very limited room for the short-tenor government sukuk to rally much further from here.”
The government lowered its 2015 growth forecast to 4.5 percent to 5.5 percent in January from as much as 6 percent, as the plunge in Brent crude cut revenue for Asia’s only major oil exporter. The midpoint could be “slightly lower” around 4.8 percent, which would still mark “very good growth,” Zeti said.
Maybank Investment sees Bank Negara staying on hold for the rest of the year, and estimates the economy will expand 4.5 percent and inflation will average 3 percent to 4 percent. The IMF sees gross domestic product increasing 4.8 percent, down from the 5.2 percent prediction in October, according to its April report.
The ringgit fell to a six-year low of 3.7350 a dollar in March and is Asia’s worst-performing currency in the past six months having lost 10.5 percent.
“There could be limited incentives for Bank Negara to cut due to the weak ringgit,” Fakrizzaki Ghazali, a credit strategist at RHB Research Institute Sdn. in Kuala Lumpur, a unit of the nation’s fourth-largest bank, said by e-mail April 17. “In the absence of any events that may lead to GDP falling below Bank Negara’s target, we think a cut in the overnight policy rate is unnecessary at this juncture.”