Posted Date: July 17, 2020

Yields on Malaysian Government Securities (MGS) ended 1H2020 significantly lower compared to 2019 in a bull-steepening move. MGS yields had initially peaked in March 2020 as global risk sentiment worsened due to the COVID-19 pandemic. The upward pressure on yields began to ease in 2Q2020 amid Bank Negara Malaysia's (BNM) aggressive Overnight Policy Rate (OPR) cuts and liquidity enhancement measures. By end-1H2020, MGS yields were broadly lower by 13bps to 91bps with the 3y note settling at 2.25% (2019: 3.01%). Meanwhile, yield on the 10y MGS dipped by 44bps to 2.87% (2019: 3.31%).

MARC expects MGS yields to remain at around current low levels for the remainder of the year compared to 2019. MGS would be supported by yield-hunting activities amid the low global interest rate environment and subdued inflation outlook. Global policymakers are expected to maintain their dovish stance in the current challenging economic climate, boosting the appeal of MGS to foreign investors seeking higher yield returns. YTD, the 10y MGS has the highest real yield compared to its regional peers in ASEAN.

While there are fears of a second wave of the COVID-19 pandemic and a deterioration in global trade relations which may sap foreign demand for MGS, we do not foresee any potential significant yield spikes in MGS for 2H2020. Supportive fiscal and monetary policies employed in Malaysia would continue to encourage local holdings as witnessed in 1H2020. Combined with BNM's recent 25-bp cut in the OPR to 1.75% on July 7, these domestic factors would keep a lid on yields. Notwithstanding this, MARC foresees a slim possibility of further OPR cuts in 2020. For 2H2020, we envisage the 10y MGS yield to hover in the range of 2.60% to 2.85%.

In the primary market, MARC expects the gross issuance of MGS/Government Investment Issues (GII) to be between RM155.0 billion and RM165.0 billion by end-2020. Our revised forecast is based on expectations of a wider fiscal deficit for 2020 in view of rising expenditure following the implementation of various stimulus packages to aid economic recovery.

However, MARC expects gross issuance of corporate bonds to moderate to circa RM80.0 billion to RM90.0 billion, similar to 2013-2016 levels. This is largely due to the ongoing COVID-19 pandemic and the subsequent movement control measures that had impeded economic activities. With weakened economic prospects for 2020, we expect real GDP and private investments to come in lower, which essentially means lower appetite for funds from corporates.

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.