Domestic bonds emerge as safe-haven assets

New Straits Times

03-05-2025

KUALA LUMPUR: Malaysian bonds have shone as safe-haven assets, mirroring a global retreat to safety as the 10-year US Treasury yields decline, analysts said.
However, they warned that the confidence in the local bonds could be precarious amid deepening global trade tensions and a vulnerable external sector.
UOB Kay Hian Wealth Advisors Sdn Bhd head of investment research Mohd Sedek Jantan said the Malaysian Government Securities (MGS) have shone as 10-year US Treasury yields declined by 36 basis points to 4.21 per cent.
The decline was driven by mounting concerns over sluggish global growth and policy unpredictability surrounding renewed US tariff threats.
"The shift toward MGS as safe-haven assets indicates that investors view Malaysia's fiscal discipline and monetary policy framework favourably, especially compared to other emerging markets, despite challenges in mining and manufacturing sectors," he told Business Times.
Even though investors currently view Malaysian bonds as safe, he said worsening global trade tensions might scare them into pulling their money out, reducing demand for MGS and potentially destabilising Malaysia's bond market.
"Malaysia's export-driven sectors - mining and manufacturing - face headwinds, risking a faltering ringgit, which recently rallied on a transient 90-day tariff reprieve. A depreciating currency could spur capital outflows, dimming bond inflows," he added.
Sedek said April's subdued secondary bond market activity signals investor caution in turbulent times.
He said Malaysia's 4.4 per cent growth in the first quarter of 2025, fuelled by robust domestic demand and construction, offers resilience but the horizon holds intrigue.
He added that a potential Bank Negara Malaysia rate cut in the second half this year, hinted at by a gloomier growth outlook, could keep yields enticing.
"Sustainability hinges on deft navigation of trade negotiations and unwavering fiscal credibility to anchor investor faith in a tempestuous global landscape," he said.
According to MARC Ratings Bhd, rising global trade tensions have driven foreign investors toward safer assets, fuelling bond inflows into Malaysia despite persistent equity outflows.
The ratings agency said foreign investors withdrew RM4.7 billion from equities in March, but this was offset by RM2.8 billion in net inflows into the bond market.
Yields on MGS declined across the curve, with sharp drops in short- to medium-term tenures reflecting strong demand for bonds amid dovish global monetary expectations and tariff-related uncertainty.
MARC said corporate credit spreads widened, signalling a shift in preference toward sovereign and high-grade bonds. Risk appetite in the secondary market also faded.
Globally, the US Dollar Index fell below 100 amid concerns over US President Donald Trump's trade policies and expectations of Federal Reserve rate cuts.
While US Treasury yields climbed on inflation fears and retaliatory selling, equity markets lost momentum.
"Despite maintaining a broadly dovish bias, central banks and global markets are adopting a cautious wait-and-see approach during the current 90-day tariff review, as Trump's policy actions are likely to remain unpredictable," MARC said.
Domestically, Malaysia's economy is expected to grow 4.4 per cent in the first quarter of 2025, down from 5.0 per cent in the previous quarter due to weaker mining and manufacturing activity.
However, domestic demand, services and construction remained firm.
Inflation stayed subdued at 1.4 per cent in March, but MARC flagged upside risks from the recent minimum wage hike and the upcoming RON95 fuel subsidy rationalisation.
Exports rose 6.8 per cent in March, driven by electrical and electronics, palm oil and machinery shipments to the US, Hong Kong and Singapore.
Despite this, MARC warned that exposure to new US tariffs would pose risks, though countries could mitigate this through ongoing supply chain diversification.
The ringgit, which initially weakened after the US tariff announcement, rebounded in April on improved regional sentiment, broader US dollar weakness and a 90-day pause on tariff implementation.