Malaysians can look to invest in short-term US Treasury for higher yields.

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Government debt such as the US Treasury has always been seen as a risk-free investment. It plays a role in diversification and stabilising an investor’s portfolio. With current high interest rates, the short-term US Treasury with maturity of 6 months to 1 year is a worthwhile consideration for investors.

Highlights

·       Fixed income securities are rather attractive given the expected higher for longer interest rates providing good risk to returns for investors

·       Given the inverted yield curve in the US, short term US treasury with 6months to a year maturity gives an attractive yield pickup for Malaysian investors

·       While currency risk remains, we do not see the ringgit to appreciate significantly against the dollar in the near future

·       We recommend investors to consider adding short term US Treasury with maturity of 6 months to a year into their portfolio

Interest rates higher for longer

The Fed’s current fight against inflation is still ongoing with current inflation rates still higher than their current inflation target of 2%. With measures of US inflation reaching decade-high in 2022, the Fed moved forcefully to curb inflation by increasing rates by 5.25% since 2022.

Chart 1: Federal Funds Rate hike post pandemic

The narrative on higher for longer interest rates remains the consensus for many, as economic data points towards a soft landing with consumer spending and the job market remaining healthy. Furthermore, recent FOMC meeting minutes indicated that Fed officials will proceed carefully when it comes to future interest rate decisions and judged the current interest rate target as appropriate with further policy tightening needed if progress towards inflation goal is insufficient.

Similarly, we think that the Fed’s fight to cool inflation will be a long one, where a return to low inflation environment in the short-term will be difficult to achieve. As such, we believe that interest rates will have to remain higher for longer with rate cuts unlikely to happen in 2024.

Interest rates in Malaysia

Malaysia was no exception with consumer price index (CPI) peaking at 4.5% in September, prompting Bank Negara to hike rates albeit at a more measured pace as compared to US. This can be partly due to the inflation cooling to 1.9% in Malaysia after consecutive rate hikes giving BNM reason to step on the brakes on rate hikes at an OPR of 3% while waiting for economic data. With inflation seen to be slowing in Malaysia, future rate hikes may be unlikely to happen.

Chart 2: Malaysian OPR

Short term US Treasury is the way to go

Yields on the short end of the yield curve followed suit with the rise in the Federal Funds Rate as both rates tend to move in tandem with each other. Furthermore, the current inverted yield curve although abnormal, provides investors with the opportunity to invest in shorter duration bonds while the returns for long term US Treasury does not compensate investors enough despite the longer duration.

Comparing interest rates in the US and Malaysia, we see that the yield curve in Malaysia depicts a normal upward sloping curve with higher interest rates in the long end of the curve. However, the short-term interest rates differential provides a clear picture of the extra returns investors can get by investing in short-term US treasury. Currently, Malaysia’s 1 year government bond interest rates stand at 3.27% while 1 year US treasury yields 5.24%.

Chart 3: US Treasury yield curve against MGS

What are the risks?

For Malaysians, investing in the US Treasury does not come without any risk as there is still currency risk. We have a slightly positive view on the MYR/USD currency pair, seeing that the ringgit may appreciate slightly against the dollar in the future as the dollar is likely to have peaked. Nevertheless, we do not see the ringgit to appreciate so significantly against the dollar in the near future.

The interest rate risk investing in the short-term Treasury is low for investors looking to buy and hold to maturity. For investors holding to maturity, the main risk would be reinvestment risk which is the risk of interest rates dropping and having to reinvest in a lower yield bond. However, as stated above, we see interest rates to be higher for longer with rate cuts unlikely to happen in 2024.

Our recommendation

Considering the factors above, namely higher for longer interest rate and the interest rate differential between the MGS and US Treasury especially in the shorter duration bonds, investors can consider investing in the US Treasury available on our platform to grab higher returns.

The Treasury notes are on our platform in Bond Express with a minimum investment of USD 1,000. Investors should note there will be an upfront fee of 0.1% or a minimum of 10 USD and a platform fee of 0.02% per quarter.

Table 1: Recommended Treasury Notes

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