Posted Date: November 23, 2020

October was vibrant for Malaysian bonds amid robust gross issuance activities, slumping yields, and heightened foreign demand. The increased appetite was mainly driven by calls for further fiscal and monetary support amid the resurgence of COVID-19 cases. This was also supported by the expectation of a gradual economic recovery. We expect GDP growth to rebound to between 6.3% and 6.7% in 2021 from this year's estimate of between -4.5% and -5.5%. Economic recovery going forward will be primarily contingent on the complete cessation of the MCO and freer cross-border movements.

Gross issuance of Malaysian Government Securities (MGS)/Government Investment Issues (GII) amounted to RM14.5 billion in October, bringing the total gross issuance YTD to RM136.9 billion, the highest seen even for any given full year. This higher supply was met by higher demand, as evidenced by the improved monthly average bid-to-cover ratio of 2.4x (Sep: 1.9x). Moving into 2021, we expect gross issuance of MGS/GII to be between RM150.0 billion and RM160.0 billion. This is based on the fact that RM67.7 billion worth of MGS/GII is scheduled to mature in 2021, as well as the government's projected budget deficit of RM84.8 billion.

As for long-term corporate bonds, gross issuance surged to RM16.2 billion (Sep: RM9.0 billion), the highest monthly issuance YTD. This was led by rated corporate bond issuers from the financial services sector. Rated corporate issuers (excluding Cagamas) were the largest contributor towards gross issuance for 2020YTD; out of a total of RM79.4 billion, they collectively issued RM39.5 billion.

In the secondary market space, the MGS market continued to record gains but performance was divergent between short- to medium-term tenures and longer-term tenures. On the one hand, yields along the short end to the belly of the curve dipped 4bps to 24bps on higher expectations of additional monetary easing; on the other hand, yields at the longer end edged higher by 5bps to 9bps amid expectations of heavier supply in 2021 to fund fiscal initiatives.

Corporate bonds also recorded gains with yields broadly lower across the "AAA", "AA" and "A" rating bands by 2bps to 17bps. Similar to MGS, gains were mostly concentrated along the 3y10y curve. However, credit spreads around these sectors widened as yields on similar tenured MGS fell more sharply.

The local bond market boasted net foreign inflows of RM8.0 billion in October (Sep: RM0.5 billion). Foreign investors found Malaysia's high real yields attractive with inflation remaining in negative territory. FTSE Russell's decision on September 24 to maintain Malaysia in its watchlist for the WGBI also supported this sentiment.

MGS, the biggest beneficiary of inflows into the Malaysian bond market in October, attracted a significantly higher m-o-m total net foreign inflow of RM3.9 billion (Sep: RM1.4 billion). Meanwhile, corporate bonds attracted RM0.1 billion (Sep: - RM0.1 billion). YTD, the local bond market has garnered total net foreign inflows of RM12.8 billion, which is 236.8% of 2019YTD's 3.8 billion.

Tan Jack Fong, +603-2717 2958/ jackfong@marc.com.my;
Firdaos Rosli, +603-2717 2936/ firdaos@marc.com.my.