Longest Asean bond rally pits analysts versus bulls on rates
September 06 2016 08:24 PM
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The headquarters of Bank Negara Malaysia is seen in Kuala Lumpur. Bond investors are betting that slowing inflation will give Malaysia’s central bank room to lower interest rates for a second time this year, while most economists predict a pause.

Bloomberg/Kuala Lumpur

Bond investors are betting that slowing inflation will give Malaysia’s central bank room to lower interest rates for a second time this year, while most economists predict a pause.
The yield on three-year sovereign notes has closed below Bank Negara Malaysia’s 3% overnight rate every day since July 13, when Governor Muhammad Ibrahim unexpectedly cut it by 25 basis points after a similar trading pattern. 
Foreigners have increased holdings of the nation’s government debt to a record 210bn ringgit ($52bn) as a gauge of the bonds rallied for 12 straight months, the longest streak in Southeast Asia and second only to Taiwan in the rest of Asia.
Vontobel Asset Management and PineBridge Investments are among investors anticipating further easing to boost the slowest economic growth in six years amid the lowest inflation in 16 months. 
While they aren’t sure a cut will come as soon as this Wednesday’s meeting, they’re at odds with the majority of economists surveyed by Bloomberg predicting Bank Negara will stand pat through the rest of the year.
“The case for another rate cut is strong,” said Valentina Chen, a Zurich-based senior portfolio manager at Vontobel, which managed 86bn Swiss francs ($88bn) as of end-June. “Timing is harder to predict as it also depends on Malaysia’s fiscal policy and the global macro environment. Malaysian bond yields would compress, but I don’t think it would reduce their attractiveness to global funds as they still offer positive yield pick-up, with many global bonds offering negative yields.”
The yield on government debt due 2019, the shortest maturity with a benchmark, declined 20 basis points since the last rate cut on July 13 to 2.85% on Monday, and reached a three-year low of 2.81% on July 19. Prior to the last review, when only Goldman Sachs Group predicted a reduction, the three-year yield had closed below the policy rate for about three weeks.
Governor Muhammad has said July’s rate cut, the first since 2009, was a preemptive move to ensure the economy expands within the central bank’s forecast range of 4% to 4.5% this year.
Malaysia’s “inflation risk is actually declining and risk to growth is slightly heightened because of the heightened uncertainty in the global economic environment,” he said August 12.
Three of 19 economists surveyed by Bloomberg see Bank Negara delivering a 25-basis point reduction on Wednesday, while the others expect it to hold fire. After this week’s review, the central bank is due to hold its final meeting of 2016 on November 23. 
Only six of 21 economists in Bloomberg’s survey predict a rate cut to 2.75% by year-end. The rest see no change. “Although our base scenario is that Bank Negara will not ease before November, we expect the market to price in a more dovish Bank Negara policy stance,” said Lawrence Lai, Asia rates strategist at Standard Chartered in Singapore. “Local demand for fixed-income assets is likely to grow further and stay constructive on ample cash held by long-term investors and a weaker macroeconomic outlook.”
Bank Negara lowered its 2016 inflation estimate in July to a range of 2% to 3%, from as high as 3.5%. Consumer prices rose 1.1% in July from a year earlier. One-year interest rate swaps fell to 3.28% on Monday, the lowest since December 2013.
Economists forecast Malaysia’s economy will expand 4.1% in 2016, the weakest pace in seven years, as tepid global demand and low energy prices damp exports. Growth slowed to 4% in the second quarter, the least since 2009.
Ten-year Malaysian debt still yields 3.54%, the highest in Southeast Asia after Indonesia, drawing global funds to Malaysia even as the ringgit slumped 1.2% this quarter.
“Bank Negara is setting itself up for a rate cut of 25 basis points before the end of the year,” said Anders Faergemann, a London-based senior sovereign portfolio manager at PineBridge, which oversees $80.7bn.



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