Bond rally slows in Malaysia amid cooling July rate cut bets
KUALA LUMPUR: Investor appetite for Malaysian bonds has cooled, with the market beginning to scale back expectations of a July interest rate cut, according to CIMB Securities.
In a research note, it said the Malaysian Government Securities curve "extended its slide", with the yield on the 10-year benchmark rising 2.1 basis points to 3.55 per cent.
The firm described the yield curve movement as a "bear-flattening", a pattern that typically signals reduced confidence in near-term monetary easing, as investors demand higher yields on longer-term bonds.
In contrast, Indonesia's bond market continued to rally, with the 10-year government bond yield falling 2.8 basis points (bps) to 6.73 per cent, driven by "increasing expectations of back-to-back Bank Indonesia rate cuts."
Although Malaysia's 10-year yield is down 26.2 basis points year-to-date, CIMB Securities said the local bond rally has been more moderate than those in Thailand and Singapore, where yields have declined by 55.5 and 54.6 bps, respectively.
However, Malaysia is slightly ahead of Indonesia, whose 10-year yield is down 23.4 bps year-to-date. Lower bond yields generally indicate stronger investor demand on expectations that interest rates will fall, boosting bond prices.
CIMB Securities maintained a base case that Bank Negara Malaysia will reduce its policy rate to 2.75 per cent by the third quarter, but market movements suggest investors may be growing cautious about a cut materialising in the July policy meeting.
The regional bond rallies reflect broader sentiment that global central banks may soon shift toward easing.
A softer-than-expected United States consumer price index for May has reinforced expectations that the US Federal Reserve will begin cutting rates this year, creating room for policy accommodation in emerging markets.
Investor confidence in sovereign credit profiles also appears to be improving. Malaysia's five-year credit default swap (CDS), a measure of perceived default risk, has tightened by 12 basis points this year to 43 bps.
Indonesia's CDS dropped eight bps to 73 bps, while Thailand's narrowed by two bps to match Malaysia's level.
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