US rate cuts to buoy foreign demand for Malaysian bonds

Published on 24 Sep 2024.

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As widely expected, the US Federal Reserve (Fed) slashed the federal funds rate by 50 bps at its latest meeting on 18 September. The onset of the US rate cut cycle will likely boost the attractiveness of Malaysian bonds and support foreign fund inflows at least through the rest of the year. Foreign investors continued to show keen interest in Malaysian bonds in August, with foreign holdings of the securities leaping RM9.0 bil following an RM7.8 bil influx in July. While the surge was primarily driven by a RM7.0 bil net inflow of MGS and GII (July: RM6.5 bil), the increase in net purchases of MTB and MITB was larger (August: RM1.3 bil; July: RM0.5 bil). The ringgit also largely benefitted, strengthening to 4.21 against the USD as of 23 September, compared to 4.61 and 4.32 in end-July and end-August, respectively.

Following the Fed’s decision, the yield differential between 10-year MGS and 10-year UST securities fell back into negative territory (18-20 September average: -1.3 bps) after briefly turning marginally positive in 1H September (4.1 bps). That said, we do not expect negative spreads to persist as the Fed is likely to trim interest rates further. As of end-August, the negative yield spread between the two had more than halved to 13.9 bps from 35.2 bps a month earlier. The Fed signalled that rates will likely be slashed by another 50 bps by the end of this year from the current target range of 4.75%-5.00%, with respective 100 bps and 50 bps cuts set for 2025 and 2026.

 

Analytical contact Nur Nadia Mazlan (603) 3385 2513 nadia@ram.com.my		Media contact Sakinah Arifin (603) 3385 2500 sakinah@ram.com.my
Nur Rasyidah Abd Karim (603) 3385 2490 rasyidah@ram.com.my

 

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