Heatwave spells trouble for ringgit bonds with food prices set to soar

Melbourne - A stuttering rally in Malaysian government bonds may run into another roadblock as a heatwave sweeping across South-east Asia threatens to drive up inflation.

Benchmark yields are likely to face further upward pressure if faster price gains prompt Bank Negara Malaysia to tighten policy again. Turbulence in US Treasuries fuelled by the prospect of a United States debt default may also stoke volatility in the near term.

The odds are stacked against ringgit bonds after the central bank warned that inflation may flare up again, with commodity prices and an impending reduction in domestic subsidies among the key drivers. Global funds halted a five-month buying spree in Malaysian sovereign debt in April amid uncertainty over the US interest rate outlook.

Investors have turned cautious about ringgit bonds after pushing 10-year yields to the lowest since March 2022 earlier in May on bets that borrowing costs may have peaked.

The shift in sentiment comes as the authorities warn that the ongoing hot weather may hit the nation’s food supplies.

Malaysia’s food inflation “certainly” faces an upside risk from the scorching temperatures that are expected to last until August, according to Moody’s Investors Service, which thinks that another rate hike is possible.

Economists expect a report due on Friday to show that the nation’s annual consumer price growth eased to 3.3 per cent in April from 3.4 per cent in March.

Bank Negara Malaysia has delivered five rate hikes in the past year, with the latest increase taking place on May 3 as policymakers sought to ward off the risk of financial imbalances.

Still, not everyone thinks that rates are headed higher. ANZ expects the authorities to deploy fiscal and administrative measures instead to tackle any increase in prices.

“The ringgit bond market has one of the most constructive local supply-demand dynamics, which we expect to continue anchoring yields amidst a volatile global rates backdrop,” said Ms Jennifer Kusuma, senior Asia rates strategist at ANZ.

For its part, Maybank Securities thinks that the gains in Malaysian bonds may have run their course for now, although 10-year yields are likely to drop to 3.5 per cent by year-end from around 3.8 per cent now.

“It requires some external drivers, for example, a stabilisation in US Treasuries, for investors to regain confidence and resume the rally,” said Mr Winson Phoon, head of fixed-income research at Maybank Securities. “I reckon a good buy on dip demand to cap or slow yield increases, but a rally would require stronger catalysts.”
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