Posted Date: October 20, 2020

In September, yields on Malaysian Government Securities (MGS) corrected higher after experiencing record-lows in August. On September 10, MGS yields at the short end of the curve increased the most as Bank Negara Malaysia's (BNM) decision to maintain the Overnight Policy Rate (OPR) at 1.75% has reduced speculation of further rate cuts for 2020.

BNM has hinted that no further reduction in OPR was needed as both the global and domestic economies have shown signs of improvement amid the easing of containment measures and strong policy support. MGS yields continued their steady rise in the following two weeks as investors took defensive positions ahead of the FTSE Russell annual review on September 24. MGS were also pressured by increased domestic political concerns and falling global crude oil prices during the period.

In the final week, pressure on MGS yields eased as investors breathed a sigh of relief following FTSE Russell's decision to retain Malaysia in the World Government Bond Index (WGBI). It acknowledged BNM's additional initiatives to improve the govvies' market accessibility – including improved secondary market bond liquidity and enhanced FX market structure for foreign investors.

However, Malaysia remains on FTSE Russell's watchlist for potential exclusion from the WGBI. FTSE Russell stated that it will continue to engage with stakeholders over the next six months to assess the efficiencies of the new initiatives introduced by BNM. The upcoming review is scheduled for March 2021.

Against this backdrop, MGS continued to find favour among foreign investors. It attracted net foreign inflows of RM1.4 billion (Aug: +RM3.2 billion), taking foreign holdings of MGS to RM169.2 billion, which is equivalent to 38.8% (Aug: 39.2%) of its total outstanding. Year-to-date, total net foreign inflows into MGS amounted to RM5.3 billion.

Over the month, the MGS yield curve flattened as both the short end and belly of the curve underperformed while the long end gained. Yields at the short end surged circa 5bps to 16bps m-o-m while those along the belly surged circa 4bps to 14bps m-o-m. Meanwhile, MGS yields along the 15y20y curve dipped circa 4bps to 12bps m-o-m. At end-September, benchmark yields on the 3y and 10y MGS were last quoted at 1.99% (Aug: 1.84%) and 2.66% (Aug: 2.62%).

Tan Jack Fong, +603-2717 2958/ jackfong@marc.com.my;
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my.