Soaring inflation led to surging bond yields across the global markets in January 2022. The Federal Open Market Committee meeting saw the US Federal Reserve (Fed) leave the federal funds rate unchanged in the first month of the year. Nevertheless, future rate hikes are expected as the Fed hinted that its asset purchasing activities are likely to halt in March 2022 along with the accelerated consumer prices inflation rate recorded in January. In the EU and the UK, rising energy prices and supply chain bottlenecks continue to impart upside risks to the inflation rate.

Local govvies remained under pressure in January as the global bond sell-off that has been driven by rising inflation persisted. Heavy selling was apparent in the mid- to longer-tenure space, with the 5- to 20-year Malaysian Government Securities (MGS) yields surging between 9bps and 15bps. Of note, the 10-year MGS yield settled at 3.67% (December 2021: 3.58%), the highest since June 2019. Meanwhile, the 3-year MGS yield saw a marginal increase to 2.84% from 2.80% in the preceding month.

At the first Monetary Policy Committee (MPC) meeting of 2022, Bank Negara Malaysia (BNM) held the overnight policy rate (OPR) unchanged at the record low of 1.75%, as widely expected. BNM appeared to be taking a cautious stance and has thus far provided little clues on its future monetary policy moves amid persistent downside risks. We believe that abrupt changes in the monetary policy are unlikely, and the monetary settings will remain sufficiently accommodative for some time to support the economy's fragile recovery. A higher interest rate would only be possible with a drastic change in the external environment or a speedier pace of pass-through amid surging input costs.

MGS/Government Investment Issues (GII) outstanding totalled RM915.8 billion as of end-January 2022, representing a growth of 8.1% y-o-y. Gross issuance of MGS/GII throughout the month rose to RM12.0 billion (December 2021: RM4.5 billion), attributed to a higher issuance in the MGS segment (January 2022: RM9.5 billion; December 2021: RM4.5 billion). Meanwhile, the total/gross new issuance of GII papers declined to RM3.0 billion from RM3.5 billion recorded in the previous month.

In January, foreign participation kicked off robust, despite the escalating global bond yields. Overall, the local bond market recorded foreign inflows of RM3.5 billion (December 2021: RM6.1 billion), which hiked up foreign holdings' share of total outstanding to 14.8% (December 2021: 14.7%). Foreign flow movement in local govvies and corporate bonds diverged, where government bonds experienced an inflow of RM4.0 billion. Meanwhile, corporate bonds logged a foreign outflow of RM594 million.

The full report can be accessed here.