Fixed Income & Currency Outlook - October
September lived up to its reputation as one of the toughest months for bond investors. Government bonds sold off worldwide, pushing the average yield on global government debt to nearly 4%, a level last seen in 2007. Stronger-than-expected U.S. economic data, stubborn inflation, rising oil prices and mounting worries about government borrowing rattled investors.
U.S. Treasuries bore the brunt of the selloff, with yields climbing across the board. The two-year note ended the month at 4.89%, up 49 basis points. The 10-year finished at 5.29%, also up 49 basis points, and the 30-year at 5.63%, up 36 basis points. Bond prices fall when yields rise.
The Federal Reserve raised interest rates during the month. Several officials, including New York Fed President John Williams and Philadelphia Fed President Anna Paulson, signalled that more modest increases may be needed to bring inflation back to the central bank’s 2% target.
To ease pressure from rising long-term borrowing costs, the Treasury Department said in late September that it would buy back up to $6 billion of longer-dated bonds, triple its original plan.
Malaysian Government Securities (MGS) also came under pressure, though the moves were milder than in the U.S. Yields rose across the curve, and the 10-year yield climbed to 4.05% from 3.91%. It briefly touched 4.18% in mid-month before pulling back.
One concern is the shrinking yield advantage that Malaysian bonds offer over Japanese government bonds. The extra yield on 10-year MGS has narrowed to about 95 basis points, far below its five-year average of 278 basis points. That raises the risk that Japanese investors, a key source of demand, will scale back their Malaysian holdings. Demand at bond auctions across the region was also softer.
The near-term outlook remains difficult. October has historically been the second-weakest month for Treasuries, with a median loss of 0.7% over the past decade.
Risks include the ongoing U.S.-Iran conflict, large government deficits, and a Fed that may not be done raising rates. A rise in corporate bond sales, particularly from big technology companies, could also add to the supply of long-term debt and push yields higher.
For Malaysian bonds, the picture is mixed. Domestic fundamentals remain sound, and the country’s rise as a regional data-center hub continues to draw long-term investment. But the threat of Japanese outflows and elevated global yields may keep upward pressure on MGS yields for now.
The U.S. dollar gained broadly in September. The DXY Dollar Index, which measures the greenback against a basket of major currencies, rose about 1.8% to 101.45 from 99.68. The dollar drew support from the Fed’s rate hike, resilient U.S. data, and higher oil prices, reinforcing expectations that interest rates will stay high for longer. Most regional currencies weakened against it.
The ringgit was among the region’s weakest performers, falling about 1% to 4.08 per dollar from 4.04, and reportedly trailing every other Asian currency over the month. The dollar’s strength and softer demand for Malaysian bonds weighed on the ringgit.
The dollar is likely to stay firm as long as the Fed keeps its hawkish tone and U.S. data remain solid. Early October trading shows most Asian currencies still under mild pressure.
For USD/MYR, technical analysis points to resistance near 4.10 per dollar after a steady recovery from September’s low of 4.03. We expect the currency pair to trade within this broad range in the coming weeks. Dollar strength poses a threat, but higher oil prices, which benefit Malaysia as a net energy exporter, and steady investment tied to artificial intelligence should provide some relief.
