KUALA LUMPUR (July 7): The continuing divergence of interest rate policies between Malaysia and advanced economies could pressure the local bond market in the near term, cautioned MARC Ratings Bhd.

This is due to the risk of a reversal in positive foreign inflows amid yield chasing activities among investors, the rating agency said in a statement on Friday.

“Given a slate of economic data supporting hawkish views, rate tightening in the advanced economies will likely result in a rise in the US Treasuries (UST) and bond yields,” it said.

While Malaysian Government Securities (MGS) still command positive yield differentials with UST, MARC said that the spread has narrowed significantly to 11 basis points (bps) on June 26, compared with the average spread of 108 bps in 2022.

“Nevertheless, the narrowing yield spread of corporate credit bonds and positive foreign flows of RM17.8 billion (Jan-May) in local government securities since the beginning of the year reflect the resilience of Malaysia’s bond market in June,” it noted.

MARC highlighted that the ringgit along with other regional currencies have been performing poorly, facing challenges against the US dollar due to tighter US monetary conditions and a weaker external environment.

“The anticipated more aggressive tone on rate tightening in the advanced economies could heighten global recession risk concerns and lead to continued safe haven flows among investors,” it said.

On the latest retail and exports data, MARC said it implies a slower domestic economy in the second quarter of 2023, which is imminent given the anticipated slowdown in the global economy.

“Notably, the second straight month of moderation in the seasonally adjusted volume index of wholesale and retail trade (April: 4.7%, March: 9.4%) along with interest rate tightening and normalisation of supply chains potentially indicate the end of the post-pandemic consumer spending surge," it stated.

MARC opined that consumer spending should remain relatively resilient to provide a buffer to steady gross domestic product (GDP) growth momentum going forward.

“Hence, we are maintaining our 2023 GDP growth forecast at 4.2% for Malaysia. Inflation in 2023 is expected to soften to 2.8%.

"Overall, the narrative of rising global risk factors together with the easing inflation trend should provide Bank Negara Malaysia (BNM) the scope to keep the overnight policy rate unchanged at 3% in the near term," it said.

MARC added that investors will closely monitor several key monetary policy meetings to be held in July including those by the US Federal Reserve, the European Central Bank and BNM for further hints on their interest rate outlook going forward.

BNM announced on Thursday (July 6) that it has decided to maintain OPR at 3% amid slowing inflation and continued, albeit slower, economic growth.

The central bank said the rate remains slightly accommodative and supportive of the Malaysian economy, while the central bank's Monetary Policy Committee (MPC) continues to see limited risks of future financial imbalances.