Malaysian Bond Rally Falters as Central Bank Dashes Easing Odds

  • Three-year yield fell to lowest since 2009 on Thursday
  • Inflation eased to slowest in more than a year in June: survey

A rally in Malaysian bonds showed signs of faltering after new central bank Governor Muhammad Ibrahim dashed odds for a further interest-rate cut following Wednesday’s surprise easing.

Three-year notes trimmed a third week of gains spurred by the first shift in monetary policy since 2014, in what Muhammad termed as a “preemptive” cut. He said in an interview with the Bernama news agency that there’s no plan to reduce borrowing costs again but will assess the data and “keep an open mind” in future meetings. Inflation numbers next week are expected to underscore the decision to lower rates in a move last repeated in 2009.

“The earlier-than-expected cut in the overnight policy rate prompted the market to start pricing in the possibility of another cut by the end of 2016,” said Winson Phoon, a fixed-income analyst at Maybank Investment Bank Bhd. in Kuala Lumpur. “But that piece of news from Bernama lowers the hope of a second cut, although it is still very much data-dependent.”

The yield on notes due in 2019 rose three basis points to 2.87 percent in Kuala Lumpur, after falling to 2.85 percent on Thursday, the lowest for a benchmark of that maturity since October 2009. The five-year yield advanced two basis points to 3.17 percent.

While yields rose on Friday, they were still lower than a week ago. The three-year yield was down 16 basis points from July 8. The 10-year rate dropped 13 basis points after closing at 3.55 percent on Thursday, the lowest since 2013.

Ringgit Stimulus

The ringgit also rallied this week on optimism lower interest rates will stimulate the $296 billion economy, which is being driven more by domestic demand than exports. Overseas shipments unexpectedly contracted in May, with Malaysia susceptible to gyrations in crude prices given it is Asia’s only major net oil exporter. Brent crude fell 1.1 percent to $46.85 a barrel on Friday, well below its 2014 peak of $115.

Malaysia’s currency appreciated 2.2 percent from July 8 and touched 3.9300 per dollar on Friday, the strongest level since May 4, according to prices from local banks compiled by Bloomberg. It’s Asia’s best performer this year after the yen, rebounding from the worst in 2015.

Consumer prices increased 1.8 percent in June from a year earlier, the slowest pace in more than 12 months, according to the median forecast in a Bloomberg survey before data due July 20.

The Bloomberg Malaysia bond index for ringgit securities rose for a 14th day on Thursday, and was headed for its biggest weekly gain since the data started in 2010, having risen 0.9 percent.

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