Malaysian bonds trail peers in August on supply, rate-hike concerns

Malaysia's economy outpaced estimates in the second quarter, leading to expectations of an interest rate increase. This news has caused Malaysian bonds to lag behind their Southeast Asian peers in August. The yield on 10-year bonds surged by 16 basis points, the largest increase in nearly two years, surpassing the gains in Thailand and Singapore.

Yields on similar-maturity debt in the Philippines and Indonesia fell by at least 10 basis points each. Winson Phoon, head of fixed-income research at Maybank Securities in Singapore, noted that the selling pressure has been more persistent than anticipated, contributing to a bearish steepening of the yield curve. This steepening is attributed to the surge in supply, including auctions of 20- and 30-year bonds, concerns over Treasury duration, and the potential for policy rate normalization.

Ringgit swaps have nearly fully priced in a 25-basis-point rise in Malaysia's benchmark rate over the next year, just days after the data release. The country's economy, boosted by semiconductor exports tied to AI expansion and strong domestic demand, has managed to offset the effects of the Middle East conflict. Bank Negara Malaysia has maintained its benchmark rate at 2.75%, having cut it a year ago.

The 16-basis point increase in Malaysia's 10-year yield is significantly higher than the average decline of about 10 basis points observed in similar-dated bonds for Indonesia, Thailand, the Philippines, and Singapore. The 26-basis point gap represents the widest disparity since at least January 2020. Investment manager Fesa Wibawa from Aberdeen Group attributes the recent selloff mainly to supply, positioning, and relative-value adjustments, rather than a substantial reassessment of Malaysia's outlook.