Continued US Fed rate cut expectations to pressure bond yields downwards

Published on 21 Mar 2025.

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Bond yields have been broadly declining amid growing expectations of monetary policy easing in the US. As of end-February, the 10-year UST yield plunged 34 bps m-o-m to 4.24%, reflecting the general risk sentiment and market positioning ahead of the Federal Open Market Committee (FOMC) meeting on 18-19 March. While traders broadly anticipate the Federal Reserve (Fed) to hold rates steady, rate cuts are back in the conversation following the recent softer than expected inflation print and an uptick in US unemployment rate for February. 

As widely expected, the Fed maintained interest rates at its current level of 4.25%–4.50% at the March 2025 FOMC meeting. However, the Fed still expects interest rates to fall in the latter half of the year, with the dot-plot projection indicating two more 25 bps cuts for the remainder of 2025. Additionally, the Fed announced a further scaling back of its quantitative tightening, which will indirectly provide some support to the economy while also paving the way for a potential rate cut. Following the meeting decision, the 10-year UST yield dropped to 4.25% on 19 March from 4.29% the previous day, reflecting market sentiment in response to the Fed’s forward guidance.

Given that the 10-year MGS yield only fell 1.1 bps m-o-m to 3.18% as at end-February, the steeper dip in UST yields helped narrow the positive spread it holds against MGS to 42.7 bps (end-January: 75.6 bps). The more favourable spread for MGS helped support the ringgit as it averaged 4.44 against the USD in February (January average: 4.47). The ringgit appreciated further to 4.43 against the greenback on 20 March (end-February: 4.47), as anticipation of future US monetary policy easing led to USD weakness. The US Dollar Index declined to 103.90 points as of 20 March, down from 107.25 points at the end of February.

Looking ahead, ringgit volatility may persist should the Fed maintain a cautious stance, amid the heightened uncertainty around the economic outlook. The Fed’s latest macroeconomic projection indicated a downgrade in GDP growth and a bump up in inflation rate, which will complicate its ability to achieve its dual mandate. Furthermore, the Fed’s statement and press conference revealed a more nuanced stance, signalling a cautious approach and emphasising the need for greater confidence in sustained inflation reduction before initiating rate cuts. Prolonged uncertainties may further aggravate foreign fund outflow from the Malaysian bond market in the coming months. Foreign investors turned net sellers of MGS and GII (RM1.6 bil) again last month after a brief return in January. Despite sustained inflows into corporate bonds in February, amounting to RM618 mil, the overall capital outflow stood at RM1.1 bil (January inflow: RM1.2 bil).

 

Analytical contact Woon Khai Jhek, CFA (603) 3385 2512 khaijhek@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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