Malaysian bonds headed for weekly gain as global outlook worsens

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(Oct 17): Malaysia’s 10-year government bonds climbed for a fifth week, the longest run of gains since they were issued in January, as a worsening outlook for the global economy prompted investors to favor the safest assets.

The MSCI AC Asia Pacific Index fell to a seven-month low following reports this week that showed U.S. retail sales dropped in September, German investor confidence sank to a two- year low and China’s factory-gate prices declined. Malaysia, which has the highest credit rating among developing nations in Southeast Asia, cut fuel subsidies and detailed plans for a consumption tax this month to narrow its budget deficit.

“The risk-off tone in general is creating demand for bonds with high credit quality,” said Kumar Rachapudi, a Singapore- based rates strategist at Australia & New Zealand Banking Group Ltd. “Bonds with high credit quality as well as countries which have improved macro fundamentals will be bid. Malaysia is one of them.”

The yield on Malaysia’s 4.181 percent sovereign bonds due July 2024 declined four basis points this week to 3.80 percent as of 10:07 a.m. in Kuala Lumpur, the lowest since the notes were sold in January, data compiled by Bloomberg show. The rate was steady today.

The ringgit weakened 0.8 percent since Oct. 10 to 3.2830 per dollar, according to data compiled by Bloomberg. It was little changed today.

Malaysian Prime Minister Najib Razak increased fuel prices on Oct. 2 and announced in last week’s budget that a 6 percent sales tax would be implemented in April. The authorities will lower the fiscal shortfall to 3.5 percent of gross domestic product this year and 3 percent in 2015, from 3.9 percent in 2013, Najib said in the Oct. 10 budget speech in parliament.

Standard & Poor’s rates Malaysia A-, the fourth-lowest investment grade and one notch above Thailand and four above Indonesia.

The ringgit’s one-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 81 basis points in the past five days and 19 basis points today to 7.92 percent, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.