Malaysia’s interest rate to rise, liquidity to keep yields stable

Esther Teo

KUCHING: As global interest rates declines, Malaysia’s interest rate cycle is expected to improve with the possible increase of Overnight Policy Rate (OPR) which could be implemented as early as July.

The ample liquidity in the country is also expected to keep bond yields stable during this period, says Hwang Investment Management Bhd.

Head of fixed income Esther Teo said in the recent Monetary Policy Committee Meeting, BNM was seen as ‘hawkish’ and stated that it expects Malaysia’s growth momentum to be sustained by steady private sector domesitc demand, coupled with improvement in external demand.

“(The) first quarter 2014 (1Q14) gross domestic product (GDP) came in strong at 6.2 per cent and inflation is expected to inch up to 3.5 per cent.

“With that, many analysts and fund managers including us are of view that the interest rate cycle in Malaysia is likely to be the first to turn, with BNM looking to increase the OPR by 25 basis points to 3.25 per cent as early as July 2014,

“Having said that, the ample liquidity in Malaysia is expected to keep bond yields relatively stable this time,” Teo viewed.

To note, since the start of the year, yields for the 10-year Malaysian Government Securities (MGS) were trading at 4. 12 versus 4.03 per cent as at the end of May 2014.

On the global platform, the yields for the 10-year US Treasuries (USTs) started at three per cent at the beginning of the year and ended at 2.48 per cent at the end of May while Germany Government Bond (BUND) and Japanese Government Bond (JGB) fell in line with its peer.

“The lower yields in the global markets are currently driven by the dovish central banks such as the US Federal Reserve and the European Central Bank (ECB),” Teo said.

She also said global economic data was mixed while inflation has been viewed as still manageable in recent months.

Pension funds and central banks are also seen buying USTs (2.48 per cent) as the yields are looking attractive against German BUNDs (1.36 per cent) and JGB (0.58 per cent).

“All these factors provide support to global bond yields to remain low in the near term,” Teo commented and added that lower bond yields are positive for Asian currencies, bond markets and equity markets performance.

Additionally, Teo said, though interest rates have fallen this year, “For the longer term, interest rates will rise as we believe that the US economic growth will pick up into the second half of 2014
(2H14).

“After a weak 1Q growth, due to harsh winter condition, we expect growth to recover stronger in the next six to nine months.

“The Fed could start to embark on a tightening rate cycle in 2015 to 2016 if growth is stronger than expected. This would cause bond yields to rise in the medium term,” she divulged.

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