Posted Date: June 17, 2020

Yields on Malaysian Government Securities (MGS) remained supported in May as Bank Negara Malaysia (BNM) cut its Overnight Policy Rate for the third consecutive time. With growth prospects worsening and deflation risks rising in the face of the COVID-19 pandemic, there are high expectations of further monetary easing. Support also came from BNM's move to allow banking institutions to recognise MGS and Government Investment Issues (GII) to fully meet the Statutory Reserve Requirement (SRR) compliance.

Despite worsening growth prospects and rising deflation risks, the month of May saw foreign investors returning to become net buyers of local bonds. Net foreign inflows came in at RM1.5 billion, compared with -RM2.0 billion in April. As a result, total foreign holdings rose to RM187.3 billion (12.2% of the total outstanding), from RM185.8 billion (12.1%) previously. MGS saw the largest foreign inflows, with the flows largely concentrated in tenures at the front-end of the yield curve. As of end-May, foreign holdings of MGS stood at RM150.5 billion, up 1.3% from April's RM148.6 billion.

The net foreign inflow into the local bond market in May suggests that Malaysia continues to remain on investors' radar. BNM's monetary easing thus far and expectations of further easing down the road were no doubt part of the reason. In addition, Malaysia's external position, remains commendable, thanks to persistent current account surpluses. On top of that, government debt is largely denominated in domestic currency, with that denominated in foreign currencies making up only around 3% of the total.

Meanwhile, in the primary market for MGS/GII, overall demand was weaker even as gross issuance fell by 32.1% (May: RM9.5 billion; April: RM14.0 billion). While the 15y GII commanded a respectable bid-to-cover ratio of 2.2x, the 10y MGS recorded a lacklustre 1.7x, the lowest thus far this year. This was due largely to its large tender size of RM4.5 billion, one of the largest YTD. In the secondary market, however, there was investor interest. The MGS yield curve, for example, ended May steeper, led by the aggressive decline of the 3y note to 2.28% from 2.42% a month ago. As a result, the 10y/3y spread widened to 53bps from 45bps previously.

Unlike the case for MGS/GII, the gross issuance of long-term corporate bonds rose by a significant 129.0% to RM7.1 billion in May. The rise was largely driven by issuances in the financial services (48.3% of total) and diversified holdings sectors (28.9%). DanaInfra Nasional Bhd dominated the financial services sector with its RM2.8 billion Islamic Medium-Term Notes (IMTN). In the diversified holdings sector, Danum Capital Bhd led with its RM2.0 billion IMTN.

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.