SINGAPORE (Sept 5): Investors are snapping up Malaysian bonds without resorting to hedging, supercharging a rally in the country’s currency that’s Asia’s top performer this year.

Global funds bought RM8.1 billion of Malaysian government bills and bonds in August, the largest inflows since July 2023, according to Bloomberg calculations based on data from Bank Negara Malaysia (BNM). This came as hedged investments turned less profitable, spurring a 6% gain in the ringgit last month. 

“Foreign bond demand has been largely driven by expectations of ringgit gains, with the bulk of demand probably going in on a foreign exchange-unhedged basis,” said Winson Phoon, the head of fixed-income research at Maybank Securities Pte Ltd. 

Malaysia’s improving economic prospects are making the nation a bright spot in the region, with inflows coming into bonds as well as stocks. That has helped lower bond yields, reducing borrowing costs for the government, which is expected to outline next year’s budget on Oct 18.

The correlation between an index of foreign inflows into Malaysian debt and the ringgit has become stronger in the past six months, suggesting a rise in unhedged buying.

An unhedged Bloomberg index of Malaysian bonds has given a total return of 9.74% to dollar-based investors this quarter — the highest in emerging Asia. In comparison, a similar hedged index offered a gain of only 1.7%.

Malaysian bond inflows haven’t always translated into gains for the local currency. The ringgit lagged all emerging Asian peers in the first half of 2023 despite net inflows, as part of the investments were hedged. Investors who seek to insulate their holdings of Malaysian bonds from exchange-rate fluctuations place bearish positions on the ringgit while buying debt, offsetting appreciation pressure on the currency. 

Malaysia’s bonds and currency have also been supported by the nation’s manageable inflationary pressures, adherence to fiscal deficit targets and political stability compared to Thailand and Indonesia. The rally now hinges on moves from the US Federal Reserve (Fed) as well as the nation’s central bank. 

While signs of a potential easing by BNM will further boost the nation’s bonds, it’s unlikely to come at Thursday’s decision, with economists surveyed by Bloomberg forecasting rates to be kept unchanged at 3%.

Looking ahead, foreign flows could slow if incoming US economic data fails to support the already dovish Fed pricing, said Phoon. 

Uploaded by Tham Yek Lee