Trump win to worsen biggest selloff in ringgit bonds since 2020

Malaysian bonds are turning vulnerable to further outflows as local yields are seen rising along with those on Treasuries with Donald Trump poised to be the next US president.

The nation’s corporate and sovereign bonds saw a net outflow of 11.2 billion ringgit ($2.6 billion) last month, the most since March 2020, according to Bank Negara Malaysia data complied by Bloomberg. Along with the fallout of a Treasury selloff, the ringgit’s decline brought about by a stronger dollar is seen pushing up local yields further due to the rising correlation between the two.

“The election outcome portends to sustained dollar strength and coupled with prospective Treasury curve steepening, could risk a further foreign withdrawal from the EM local currency asset class, with Malaysia’s lower-yielding bonds at risk,” said Philip McNicholas, Asia sovereign strategist at Robeco Group in Singapore. “This could see an extension of foreign bond outflows in October.”

Malaysia’s 10-year yield rose to the highest in six months and the ringgit slid to the lowest since August this week as Trump’s victory pummeled emerging markets globally. The 90-day correlation between the two asset classes rose to 0.63 – signaling that they have been increasingly moving in lockstep. Their correlation is also the highest in emerging Asia, which suggests further ringgit weakness would result in a concurrent rise in yields and drive outflows from the nation’s debt market.

Bond outflows in October were mainly driven by dwindling bets for Federal Reserve interest-rate cuts, following its half-percentage-point reduction in September. Uncertainties around US elections and disappointment over China’s stimulus measures were other factors that pushed up Malaysian yields.

There was an “unwinding of inflows following two straight quarters of strong gains in 2Q and 3Q, majority of which could be driven by fast money accounts such as offshore banks,” according to Winson Phoon, head of fixed-income research at Maybank Securities Pte.

The Malaysian currency raced ahead of all emerging-market peers in the quarter ended September. Bonds saw a cumulative 18 billion ringgit net foreign inflow over the same period, the most since 2012.

Tariff Risk

Around 11% of Malaysia’s total exports go to the US, according to 2023 data from the International Monetary Fund, making the ringgit sensitive to any tariffs imposed by Trump.

The allure of Malaysian bonds for foreign investors is also fading as Bank Negara Malaysia extended its rate pause on Wednesday. Meanwhile, central banks in the Philippines, South Korea, Thailand and Indonesia have all kicked off rate cuts. Indonesian bonds attracted a net foreign inflow of $967 million in October, the sixth straight month of purchases.

While overseas investors may be cooling on Malaysia’s debt, outflows will remain manageable, according to Maybank’s Phoon. “A repeat of disorderly selloffs in ringgit bonds and FX like November 2016 is unlikely as investors have already positioned defensively in the run up to the voting day and the foreign share in Malaysian government bonds is a lot lower now,” he said. – Bloomberg