Malaysian Bonds Will Gain This Year on Currency Bets, RHB Says

Malaysian government bonds will extend gains this year as overseas funds buy them on speculation the currency will strengthen, said RHB Research Institute.

Investors should purchase 10-year bonds as they will return more than shorter-dated securities as the so-called yield curve flattens, said Ray Choy, head of debt market research at the institute, a unit of RHB Capital Bhd, the nation's fourth- largest banking group said.

The ringgit, which has risen 2.8 percent this year, may gain another 3.9 percent to 3.3 per U.S. dollar by March 2008, RHB predicts.

``Liquidity from foreign funds will be the key determinant to higher bond prices,'' Kuala Lumpur-based Choy said. ``The market tone is bullish because the ringgit appreciation theme still holds.''

Malaysia's 188.5 billion ringgit ($54.6 billion) government debt market handed investors a return of 2.7 percent this year, the fourth-best performer of 10 Asian local-currency bond markets tracked by HSBC Holdings Plc. The securities are heading for their fourth yearly gain.

The yield on the benchmark 10-year note due February 2017 rose 6 basis points to 3.56 percent on July 2, according to the central bank. The yield, which moves inversely to its price, started the year at 3.77 percent. A basis point is 0.01 percentage point.

Spread Widens

The spread between three- and 10-year yields widened to as much as 31 basis points last month. The difference in yield, currently 24 basis points, will narrow to this year's average of about 10 basis points, RHB predicts.

Benchmark 10-year yields surged 30 basis points last month as global risk aversion prompted the biggest slump in the notes in four years, according to Bloomberg data.

``My strategy is to buy the 10-year notes on blips when the spread widens to in excess of 10 basis points, as it did in June,'' Choy said.

The ringgit, which traded at 3.4345 per U.S. dollar yesterday, reached a nine-year high of 3.38 on May 23. It may climb to 3.37 in the third quarter and 3.35 by year-end, according to the median forecast of economists surveyed by Bloomberg News.

``The potential currency gain is certainly appealing from a foreign investor's point of view,'' said Hoe Cheah Kit, who helps manage about $4.3 billion in Kuala Lumpur at Mayban Fortis Insurance Group, a unit of Malaysia's biggest banking group. ``What it could also bring is increased volatility to the bond market over time.''

Franklin, Fidelity

Franklin Resources Inc. and State Street Global Advisors were among global investors holding 17.6 billion ringgit of the nation's bonds at the end of March, according to data compiled by Bloomberg. Franklin, Vanguard Group Inc. and Pictet & Cie all added to their holdings of Malaysian government bonds during the month.

Global investors have since raised their holdings to 19 billion ringgit, an 82 percent increase from a year earlier, according to the latest central bank data. The purchases helped push benchmark three- and five-year yields below the central bank's overnight rate of 3.5 percent last week for the first time since June 18.

``We believe current inflows are representative of longer- term funds,'' RHB's Choy said. ``In addition, the bullish trajectory on the ringgit will limit the risk of any sharp withdrawal of foreign funds from the market.''

Citigroup Index

Malaysian bonds were yesterday included for the first time in Citigroup Inc.'s World Government Bond Index, a global benchmark tracked by about $1 trillion of funds of which half is estimated to be in Asia.

The world's biggest financial services firm added 17 Malaysian government bonds in its July update of the index, each of which meets its criteria of an outstanding issue of at least 4 billion ringgit and more than a year left to maturity, according to data published on its Web site.

Malaysian debt will account for about 0.4 percent of the index, representing a market size of about $39.7 billion, Citigroup said June 26. It will be only the fourth Asia Pacific nation represented after Japan, Singapore and Australia.

Overseas demand for Malaysian bonds climbed in the past week as an auction of June 2012 bonds on June 28 drew the most bids for five-year notes since at least 2000, according to the central bank.

``This is a strong indicator that demand for government bonds is still robust,'' Choy said. ``The market has opened up good opportunities for ringgit bulls.''

Moody's Investors Service rates Malaysia's local-currency bonds A3, the seventh-highest investment grade, while Standard & Poor's ranks them A+, the fifth-highest.

source:bloomberg.com