Posted Date: January 14, 2020

The local bond market ended 2019 on a positive footing compared to the preceding year with MGS yields falling to multi-year lows while foreign holdings of local bonds climbed to the highest level since 2012. The significant decline in US-China trade tensions was the main stimulant for the local bond market in December 2019.

During the month, the upbeat sentiment was spurred by the US and China, which agreed on details of the first phase of a trade deal between the two countries. The move will see the US reducing tariffs on some of China’s imports and China, in return, agreed to increase their purchases of US agricultural goods. China also announced that it will cut tariffs on certain US imports ranging from food to high-tech products.

By end-December, MGS yields were broadly lower by 1bp to 12bps, settling at their multi-year lows. The decline in yields was more pronounced along the 10y and 15y sectors, flattening the yield curve, with the 10y/3y MGS yield spread narrowing to 30bps m-o-m. The 3y MGS shed 3bps from November to 3.01%, the lowest since October 2016, while the 10y MGS shed 12bps to 3.31% from 3.43% in the preceding month, the lowest since January 2009.

Corporate bond credit spreads were at an all-time low as the decline in yields was more pronounced in local govvies. As at end-December, the 5y blended credit yield spread (AAA, AA and A-rated) stood at 157bps, the lowest level seen since 2005. Yields on AAA and AA-rated corporate bonds were broadly lower by 1bp to 5bps m-o-m. Meanwhile, yields for A-rated corporate bonds, especially along the 5y15y curve, fell more sharply by 2bp to 10bps m-o-m with its yield curve flattening at end-December.

In December 2019, foreign investors increased their holdings of local bonds by RM8.1 billion m-o-m to RM204.7 billion, the highest since April 2018. Strong foreign demand for MGS was the main contributor that led to the RM5.5 billion in net foreign inflows during the month. This pushed the total foreign holdings of MGS to RM163.9 billion.

The resurgence in foreign demand for local bonds brought the total net foreign inflow into local bonds for 2019 to RM19.9 billion, the highest level since 2012, a stark contrast from a net foreign outflow of RM21.9 billion in 2018. This led to an increase in foreign ownership of local bonds to 13.7% from 13.1% in 2018. By instrument, MGS/GII papers registered a combined net foreign inflow of RM22.9 billion in the whole of 2019 compared with net foreign outflow of RM20.9 billion in 2018. However, short-term government papers and corporate bonds registered net foreign outflows of RM2.2 billion and RM0.9 billion.

In the issuance space, total gross issuance of long-term corporate bonds surged by 27% to RM132.0 billion in 2019 from RM103.9 billion in 2018, the highest amount ever recorded. Similar to the previous year, the dominant sectors that led the issuances were financial services, property & real estate and infrastructure & utilities. Robust issuance activities in 2019 were supported by the significantly lower yield environment that encouraged issuers to rush for financing.

Tan Jack Fong, +603-2717 2958/ jackfong@marc.com.my;
Ummi Kalsom Yaacub, +603-2717 2934/ ummikalsom@marc.com.my;
Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my.