Concerns are growing across the globe that more supply side issues would push inflation to levels where central banks find uncomfortable and, on top of that, dampen the already fragile economic recovery. As it is, several countries have already seen inflation rise to well above their monetary policy targets. We opine that Bank Negara Malaysia's (BNM) lift-off which could come in during 2H2022 to be ahead of the curve in dealing with rising prices and capital outflows.

Going into 2022, we foresee an upward shift of the Malaysian Government Securities (MGS) yield curve with a flattening bias. The retreat in foreign holdings of local government debt would continue in the near term, along with a weakening ringgit as investors contemplate the timing and pace of US lift-off. Nevertheless, we believe that the rise in MGS yields would not be too significant in view of the widening yield spreads between MGS and major sovereign bonds which could be alluring to yield-seeking investors. The presence of a large pool of domestic institutional investors will also lend some support to MGS.

On sovereign supply, we envisage total gross issuance of MGS/Government Investment Issues (GII) to come in within the range of RM160.0 billion to RM170.0 billion in 2022. This is premised on the government's projected budget deficit of RM97.5 billion, as well as the RM65.3 billion worth of MGS/GII that will mature in the same year. That said, we see an upside potential to our projection this year given the long-term economic scarring and lack of funding sources.

The capital-raising environment is expected to become less conducive in 2022 amid rising financing costs as central banks scale back their monetary stimulus. Notwithstanding this, with Malaysia's economy expected to remain on track for recovery, we predict corporate bond issuance to moderate only slightly in 2022 to between RM100.0 billion and RM110.0 billion.

The current trend of negative rating actions outpacing positive ones in MARC Ratings' universe will prevail as rising financing costs weigh on corporates' credit metrics. This is especially the case for sectors that have been severely impacted by the lockdown measures and where the recovery will likely remain protracted.

The full 2022 Bond Market Outlook report can be accessed here.