Posted Date: January 26, 2022
The local bond market returned positive in December, offsetting the net foreign outflow in the preceding month. Net foreign inflow into local bonds broadened to RM6.2 billion (Nov: -RM3.6 billion) amid risk-on sentiment and steady global economic recovery. Total foreign holdings jumped to RM256.6 billion (Nov: RM250.4 billion), the highest since August 2014.
Government Investment Issue (GII) led debt securities inflow with RM3.9 billion, followed by the Malaysian Government Securities (MGS) inflow of RM2.4 billion. On the other hand, corporate bonds flow moved to negative territory in December with a decrease of RM0.1 billion in foreign holdings. Overall, total foreign holdings share rose to 14.7% (Nov: 14.4%). In tandem with the net foreign inflow, the ringgit appreciated to RM4.1760 against the USD (November: RM4.2265).
Total outstanding MGS/GII papers rose to RM903.3 billion in December 2021 amid no redemption being recorded. This is notwithstanding the lower issuances in both MGS (December: RM4.5 billion; November: RM11.4 billion) and GII segments (December: RM3.5 billion; November: RM4.5 billion).
For the whole of 2021, total gross issuance of MGS/GII came in at RM163.9 billion (MGS: RM86.9 billion; GII: RM77.0 billion), up 7.9% from RM151.9 billion in the previous year. Nonetheless, the amount was lower than our forecast (RM170.0 billion to 180.0 billion) based on the upward revision in the government's fiscal deficit estimate to 6.5% of GDP from 5.4% initially (2020: 6.2%).
There were only two public offerings but zero private placement in December 2021. The sale of the RM3.5 billion 7-year GII drew decent demand with a bid-to-cover (BTC) ratio of 2.3x. However, the sentiment turned cautious following the US Federal Reserve's (the Fed) hawkish tilt, hurting the last leg of the month's auction of the RM4.5 billion 3-year MGS papers, which ended with the lowest BTC ratio since October 2019 at only 1.2x.
In December, the Fed's upbeat assessment of the economic recovery triggered a knee-jerk reaction in the bond markets across the globe – Malaysia included – with selling pressure skewed towards shorter maturities. This saw the 3-year MGS yield surging to a peak of 2.88% from 2.68% in the beginning of December, before ending the month at 2.80%. Yields on other maturities mostly ticked higher albeit at a smaller magnitude. For instance, the 10-year MGS yield rose 6bps to settle at 3.58%.
As a result, the MGS yield curve flattened with the 10y/3y spread narrowing further to 78bps from 84bps in the previous month. Investors continued to shift to the long-end of the curve in anticipation of a more imminent unwinding of monetary accommodation globally. We expect the flattening bias to persist at least in the near term as concerns grew that inflation could rise to levels where central banks find uncomfortable and, as a result of that, dampen the already fragile recovery.
The full report can be accessed here.
Contacts:
Lyana Zainal Abidin, +603-2717 2912/ norlyana@marc.com.my;
Lee Si Xin, +60-2717 2942/ sixin@marc.com.my;
Firdaos Rosli, +603-2717 2936/ firdaos@marc.com.my.
Lee Si Xin, +60-2717 2942/ sixin@marc.com.my;
Firdaos Rosli, +603-2717 2936/ firdaos@marc.com.my.