Posted Date: August 19, 2020

For the third consecutive month in July, foreign investors continued to be net buyers of Malaysian bonds, raising their holdings by RM7.1 billion to RM206.0 billion. Foreign demand was spurred by the high-yielding appeal of Malaysian bonds amid Bank Negara Malaysia's recent Overnight Policy Rate cut to a record low of 1.75% and benign consumer prices reported for June. The US Federal Reserve's pledge to keep its key interest rate near zero as well as maintain its bond purchasing programmes has also supported foreign demand for local bonds.

Malaysian Government Securities (MGS) accounted for most of the inflows (+RM7.7 billion). Foreign holdings of MGS amounted to RM164.6 billion (Jun: RM156.9 billion), equivalent to 38.2% of total outstanding MGS (May: 37.3%). YTD, cumulative net foreign inflows into local bonds have improved to +RM1.3 billion compared to the first five months of 2020 (-RM5.8 billion) after being in negative territory since February.

MGS yields ended July at their fresh all-time lows, shedding between 28bps to 44bps compared to the previous month across the curve. The gains were mostly concentrated between the belly until the back end of the curve, flattening the yield curve. At the front-end, the 3y MGS shed 32bps to 1.93% (Jun: 2.25%); at the back end, the 20y MGS shed 44bps to 3.18% (Jun: 3.62%). As a result, the 20y/3y spread narrowed to 125bps (Jun: 137bps).

Meanwhile, yields on corporate bonds continued to drift lower as well. Strong buying interest was largely seen on quasi-government, AAA and AA-rated corporate bonds. Benchmark yields for AAA, AA and A-rated corporate bonds fell by between 4bps and 25bps. Most of the gains were recorded on corporate bonds along the front end until the belly of the curve. However, yield spreads were higher as yield decline was more pronounced in MGS.

The monthly trade volume for corporate bonds surged to RM17.0 billion (Jun: RM14.3 billion). Quasi-government bonds dominated trading activities in July with 43.5% of total trades (Jun: 29.2%). Trading interest on quasi-government bonds gained traction in July amid positive news on the revival of several mega infrastructure projects such as the Johor Bahru-Singapore Rapid Transit System link.

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