Malaysia Bond Risk May Fall to Widen Gap to Indonesia, ING Says

  • Spread with Indonesian default swaps is 10 bps too tight
  • Forecasts Malaysian interest rates to stay on hold in 2016

There’s room for five-year Malaysian credit-default swaps to fall by a further 10 basis points to bring them to a fair range of 100 to 150 basis points, according to ING Groep NV.

The Dutch-based lender pegs Indonesian swaps at 150 to 200, and sees the current gap between the two countries’ default risk as 10 basis points too tight, Singapore-based economist Prakash Sakpal wrote in a research note Tuesday.

The cost of insuring Malaysian and Indonesian bonds against default has fallen as concern eased over the health of the global economy after central banks showed a willingness to support growth, helping stabilize crude oil prices. Malaysian default swaps have declined 86 basis points to 161, since reaching a six-year high in September, according to data from CMA. Indonesian contracts dropped 77 basis points to 203, descending from the highest in two years.

Bank Negara Malaysia is likely to keep the overnight policy rate at 3.25 percent this year because it probably views risks as evenly balanced between growth and inflation, Sakpal wrote. ING sees Malaysia’s 10-year government bond yield at 4 percent by end-2016, according to the report, compared with 3.84 percent on Tuesday.

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