Published August 28, 2008
Yields on Malaysian bonds seen rising

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(KUALA LUMPUR) Malaysian bond yields could spike higher as foreign investors, who have been the main buyers in the market since 2006, sell down holdings, spooked by uncertain politics, rising inflation and central bank inaction.
While the central bank's decision to hold interest rates at 3.5 per cent last Friday was a short-term positive for the fixed income market, longer-term, a flood of bond issues this year could trigger sell-offs, Merrill Lynch said in an investment report.
The Malaysian government is auctioning a total of RM15 billion (S$6.3 billion) of 5-year, 10-year and 20-year bonds till the end of the year.
Foreign investors who hold around 25 per cent of outstanding bonds have been big buyers at auctions as local institutions have shied away.
'With the performance and returns outlook now muted, both in local currency and in dollar terms, we consider it unlikely that foreign participation will continue at the old pace,' Ashish Agrawal, local markets strategist at Merrill, said in the report. 'In fact, with the BNM (Malaysian central bank) yet to hike, the bias should be to unwind any excess holdings to move to a relatively underweight position in this market.'
Malaysia's central bank has not hiked rates in response to accelerating inflation, even though consumer prices hit a 27-year high of 8.5 per cent in July.
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Given uncertain politics, due to the rise of opposition leader Anwar Ibrahim who won re-election to Parliament in a by-election on Tuesday, and the unpopularity of the government, some analysts have suggested that Bank Negara Malaysia (BNM) had come under pressure not to raise rates.
The central bank has strongly denied this, but suspicions remain amid policy uncertainty as the United Malays National Organisation (Umno), which is the main government party, comes to terms with the possibility it may lose power for the first time in 50 years.
'Political uncertainty, particularly with the upcoming Umno election in December (which might result in a leadership change), could limit the central bank's ability to move in the near term,' Mr Agrawal said.
Prolonged inaction by the central bank at a time of elevated inflation and political uncertainty could risk a sharp sell-off in the ringgit, cutting returns from holding bonds for foreign currency-based investors. -- Bloomberg