Posted Date: December 18, 2020

Malaysian bonds tanked in November, sending yields significantly higher compared to October on return of risk sentiment. Domestic investors cut down on their Malaysian Government Securities (MGS) holdings as the prospect of a quicker economic recovery had heightened, diminishing expectations of future rate cuts.

Risk-on sentiment was mainly spurred by positive news of COVID-19 vaccine breakthroughs; several vaccines have been proven effective. The improved risk appetite saw investors flocking towards riskier assets like equities. Sentiment was also lifted by the signing of the Regional Comprehensive Economic Partnership (RCEP) pact and better-than-expected 3Q2020 GDP data. Malaysia's gross domestic product (GDP) contracted by 2.7% y-o-y in 3Q2020 (2Q2020: -17.1%).

Losses in MGS were also spurred by the passing of Budget 2021 at the policy stage and the EPF's statement that it may need to liquidate assets to fund i-Sinar withdrawals. These factors have cemented expectations of higher MGS supply for 2021.

At end-November, MGS yields along the 3y15y curve were higher by 15bps to 24bps while yields at the longer end were higher by 26bps to 37bps, thus steepening the curve. Both the 3y MGS and 10y MGS were last quoted at 1.91% (Oct: 1.76%) and 2.74% (Oct: 2.62%).

Foreign investors continued to be net buyers of local bonds for the seventh consecutive month, albeit at a slower pace. Foreign buying interest was supported by COVID-19 optimism, firmer crude oil prices and Malaysia's ongoing deflationary environment. In October, Malaysia's CPI inflation had come in at -1.7% y-o-y (Sep: -1.4%).

Total foreign holdings in November rose by RM1.9 billion (Oct: 8.0 billion) to RM219.4 billion, equivalent to 13.6% of total outstanding. MGS continued to be the major beneficiary of foreign flows, followed by Government Investment Issues (GII). Foreign holdings in MGS rose by RM1.8 billion (Oct: RM3.9 billion) to RM175.0 billion, equivalent to 40.1% of total outstanding MGS.

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