Posted Date: February 13, 2020

Local bonds started 2020 on good footing as foreign investors continued to be net buyers for the third month in a row in January. Local bonds posted net foreign inflows of RM3.6 billion (December: RM8.1 billion). This brought the total foreign holdings of local bonds to RM208.2 billion (December: RM204.7 billion), equivalent to 13.8% (December: 13.7%) of total outstanding local bonds. Malaysian Government Securities (MGS) accounted for most of the net foreign inflows in January. Foreign holdings of MGS rose by RM3.3 billion to RM167.2 billion (December: RM163.9 billion) with the foreign share of total outstanding at 41.7% (December: 41.6%).

Demand was largely spurred by Bank Negara Malaysia’s (BNM) surprise reduction of the overnight policy rate (OPR) by 25bps to 2.75%, the lowest level since May 2010. BNM’s move is viewed as a pre-emptive move against a possible moderation in economic growth. Local bonds also gained buying interest from the spillover of the global bond rally during the final week of the month as a result of the worsening Coronavirus Disease 2019 outbreak.

As a result, MGS saw their yields falling to new multi-year lows in January. By end of the month, MGS yields had dipped by 19bps to 33bps across the curve on a bull-flattening bias. The 20y/3y MGS yield spread shrunk to 54bps (December: 63bps). The yield on the 3y MGS had breached the 3.00% key level for the first time since September 2016. It shed 19bps to settle at 2.88% (December: 3.07%). Meanwhile, the yield on the 10y MGS eased 17bps to 3.15% (December 3.32%).

Corporate bonds continued to be well supported in the secondary market in January as yields across the AAA, AA and A-rated spectrum fell by 13bps to 32bps. Yield spreads were also lower for the 7y and 10y sectors but higher for other sectors as a yield decline was more pronounced in MGS for similar sectors. Most of the gains were recorded on corporate bonds with 10 years’ maturity and above.

Meanwhile, in the primary market, local govvies also recorded stronger MGS/Government Investment Issue (GII) gross issuance and garnered healthier bid-to-cover (BTC) ratios. Gross issuance of MGS/GII had strengthened to RM10.0 billion (December: RM3.0 billion). The average BTC ratio in January came up to 2.7x (December: 1.6x, November: 2.3x). Both the 7y MGS and 15y GII garnered strong BTC ratios of 2.5x and 3.4x; meanwhile, the 3y MGS recorded a decent BTC ratio of 2.2x.

However, gross issuance activity for long-term corporate bonds had fallen in January, shedding RM8.2 billion m-o-m to RM4.1 billion (December: RM12.2 billion). The bulk of the gross issuance in January was contributed by the unrated corporate bond segment which was led by Khazanah Nasional Bhd’s RM2.9 billion MTN. Unrated corporate bonds comprised about 88.2% of overall issuance during the month, continuing the growing trend of its dominance in the primary market in terms of supply.

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.