Kenanga Research maintains an optimistic outlook for Malaysian financial assets, particularly local government bonds. The research firm expects the US Federal Reserve to initiate its first rate cut in September, leading to potential rate cuts [ffa6e425]. This expectation is in line with Opus Asset Management's prediction that the Fed will implement 50-100 basis point cuts in the second half of 2024 [13cf53c5]. Maybank Investment Bank (Maybank IB) also shares a positive outlook on Malaysian Government Securities (MGS), stating that almost two-thirds of net MGS+GII supply has been front-loaded in the first half of 2024. Maybank IB notes that domestic demand for Ringgit bonds remains resilient, and credit spreads in the Ringgit corporate bond market are at or near record tight [eb844809]. Maybank IB identifies three scenarios for the Overnight Policy Rate (OPR) vs. the Fed Funds Rate and maintains its positioning recommendation at mildly bullish. In the near term, Maybank IB expects the 10-year MGS yield to trade largely in the range of 3.80-3.90% [eb844809]. Kenanga Research believes that investors seeking higher yields may start reallocating their portfolios, benefiting the Malaysian debt market [ffa6e425]. Foreign investors have already shown interest in Malaysian debt, with a net investment of RM0.6 billion in April and total foreign debt holdings rising to RM266.4 billion. However, geopolitical tensions and US inflation concerns have led to some divestment by foreign investors [ffa6e425]. Despite this, the Malaysian bond market is expected to continue attracting investors due to the pause in interest rate hikes by central banks around the world, which leads to lower borrowing costs [13cf53c5]. The Securities Commission (SC) highlights the attractive yields offered by the Malaysian bond market compared to other markets, further increasing demand for Malaysian bonds. The stability and conducive environment for the bond market in Malaysia are emphasized by the SC. The ringgit's recovery may be slowed down by the resurgence of sentiment favoring 'further and fewer' Fed Funds Rate (FFR) cuts, but it won't completely derail it. Hong Leong Investment Bank Bhd (HLIB) expects the ringgit to remain weak in the near term before resuming its appreciation path in the second half of 2024. HLIB also expects the US dollar strength to subside around mid-year when it becomes more apparent that a rate cut is forthcoming. HLIB maintains a KLCI target of 1,630 for the year. MIDF Research, on the other hand, initially forecasted three rate cuts for the second half of 2024 but now believes there may only be one cut in 4Q24. Bank Negara is expected to base its policy decisions on its own evaluations [13cf53c5].
According to The Edge Malaysia, Malaysia's government bond supply is expected to slow in the second half of 2024, with gross issuance for July-December estimated to be in the range of RM83.5 billion to RM85.5 billion. This slowdown is attributed to smaller deficit financing requirements and strong investor demand. The government is targeting to narrow its budget gap to 4.3% of economic output from 5% last year. Malaysia has been implementing measures to shrink its fiscal deficit, including reducing subsidies and introducing additional taxes. Despite ongoing budget consolidation, fiscal spending remains intact, particularly on infrastructure projects. Demand for government bonds is expected to remain robust, while yields may have peaked. Bid-to-cover ratios have ranged from 1.7 times to 4.4 times year-to-date. Yields on Malaysia's benchmark 10-year government bonds have risen by about 13 basis points this year and are likely to stay elevated due to the prospects of fewer rate cuts by the US Federal Reserve. The yield on the 10-year MGS is expected to end 2024 at 3.80%. The direction of local bond yields is influenced by the US Treasury, and yields could shift lower if Bank Negara Malaysia keeps rates unchanged while the Fed cuts rates [3f287e71].