Malaysian Bonds Plunge as Outflow Concerns Mount; Ringgit Drops

Malaysia’s 10-year government bonds fell, driving the yield to a two-year high, on concern global investors will repatriate funds after $2.9 billion of sovereign debt matures tomorrow. The ringgit declined.

Capital outflows could cause the ringgit to underperform, Dariusz Kowalczyk, a Credit Agricole CIB strategist in Hong Kong, wrote in a research report today, as 10-year notes fell for a fifth day, the longest stretch in a month. Overseas investors held 33 percent of Malaysian government debt in May, the highest proportion among Southeast Asia’s biggest economies, according to central bank and finance ministry data.

“The concern is that investors will take their money and shift it offshore,” said Khoon Goh, a senior strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “The market is trying to front-run this potential redemption outflow.”

The yield on the 3.48 percent securities due March 2023 climbed 10 basis points, or 0.10 percentage point, to 4.04 percent as of 4:30 p.m. in Kuala Lumpur, data compiled by Bloomberg show. That’s the highest for a benchmark of that maturity since May 2011.

Market Vulnerable

Malaysia’s debt market is vulnerable to a global sell-off because of the size of the overseas holdings, Arjun Shetty, a rate strategist in Singapore at Deutsche Bank AG, said last week.

Borrowing costs on three-year bonds jumped to 3.69 percent yesterday, a level not reached since November 2008.

The government sold 4.5 billion ringgit ($1.4 billion) of 2020 securities today at 3.889 percent, according to data published on the central bank’s website. Demand exceeded the amount on offer by 1.91 times.

The ringgit fell 0.2 percent to 3.2315 per dollar in Kuala Lumpur, declining for a fifth day, according to data compiled by Bloomberg. It earlier dropped as much as 0.4 percent to 3.2379, the weakest level since July 2010. The currency lost 2.2 percent in July and 5.4 percent this year.

A technical indicator signals the ringgit may rebound ahead of the Federal Reserves’ July 30-31 meeting. The Federal Open Market Committee has said it may start paring stimulus should the U.S. economy meet the central bank’s forecasts.

The dollar’s 14-day relative strength index against the Malaysian currency approached 70, a threshold that signals the greenback may weaken.

The ringgit’s earlier decline was also due to concern about a possible deterioration of Malaysia’s current-account balance, Australia & New Zealand Banking’s Goh said.

The surplus fell to 8.7 billion ringgit in the January-March period from 22.9 billion ringgit in the preceding three months, official data show. The nation may record an $800 million current-account deficit in the second quarter, the first shortfall since 1997, according to a July 26 research note from Bank of America Merrill Lynch.

One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, rose 16 basis points, or 0.16 percentage point, to 8.30 percent.

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