Posted Date: May 18, 2020

Yields on Malaysian Government Securities (MGS) ended April significantly lower mainly due to the heightened expectation of an overnight policy rate (OPR) cut by Bank Negara Malaysia (BNM) at its scheduled Monetary Policy Committee (MPC) meeting on May 5, 2020. Demand for MGS was also supported by signs of falling COVID-19 infection rates in Malaysia which led to rising hopes of looser Movement Control Order (MCO) restrictions in May. The recovery of global crude oil prices and the US Federal Reserve's pledge to keep interest rates near zero and continue its asset purchasing programmes also kept MGS yields low.

By end-April, MGS yields shed between 34bps to 58bps on a bull-flattening bias as yields along the belly till the long-end of the curve fell more sharply compared to shorter tenures. The 20y/3y MGS yield spread narrowed to 96bps (Mar: 116bps). Both the 3y and 10y MGS settled at new multi-year lows of 2.42% (Mar: 2.76%) and 2.87% (Mar: 3.36%). In tandem with MGS, yields on investment-grade corporate bonds also fell. AAA, AA and A-rated corporate bond yields fell by between 25bps and 61bps in contrast with March's increase of between 36bps and 56bps.

Meanwhile, foreign selling pressure of local bonds eased in April, though foreign investors remained net sellers. Net foreign outflows from the local bond market amounted to RM2.0 billion (Mar: -RM12.3 billion). This brought total foreign holdings to RM185.8 billion (Mar: RM187.8 billion). In terms of percentage share of total outstanding, foreign ownership came in at 12.1% (Mar: 12.3%). Government Investment Issue (GII) accounted for most of the outflows (-RM1.9 billion). Foreign holdings of GII amounted to RM18.6 billion (Mar: RM20.5 billion), equivalent to 5.3% (Mar: 5.7%) of total outstanding GII.

On May 5, BNM slashed the OPR by 50bps to 2.00%, the lowest since the global financial crisis. It was the third consecutive rate cut by BNM YTD, following two 25bps rate cuts in January and March. Furthermore, BNM also announced that MGS and GII can be used by banks to fully meet the Statutory Reserve Requirement (SRR) compliance effective May 16, 2020. Previously, BNM only allowed Principal Dealers to recognise both MGS and GII of up to RM1.0 billion. This measure is expected to release about RM16.0 billion worth of liquidity into Malaysia's banking system.

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.