Posted Date: February 22, 2021

Malaysian Government Securities (MGS) began the year with heightened volatility. Yields initially swung upwards during the first week of trading. This upward momentum was then tempered by increased uneasiness surrounding domestic political developments. Surging COVID-19 cases that breached the 2,000 level also stoked fears of another round of the Movement Control Order (MCO). All these factors erased some of the previous month's gains. MGS yields were also pressured by COVID-19 vaccine delays in comparison with Indonesia and Singapore.

With the announcement of MCO 2.0 and the emergency declaration, investors switched their focus towards Bank Negara Malaysia's (BNM) January Monetary Policy Committee meeting. Investors raised their bets on another overnight policy rate (OPR) cut as recovery turned bleaker. Upward pressure on MGS yields began to ease in mid-January as investors priced in a 25bps cut. The benchmark yield of the 10y MGS bottomed at 2.63% after peaking at 2.70% in early January.

However, yields quickly rebounded higher after BNM left the OPR unchanged at 1.75%. BNM had deemed that the current monetary settings, following the cumulative 125bps OPR cuts in 2020, remain appropriate and accommodative. BNM had also extended the flexibility for banks to use MGS as well as Government Investment Issues for Statutory Reserve Requirement compliance until year-end 2022. In the final week of January, MGS yields remained elevated amid the extension of MCO 2.0 and the US reflation trade. The US reflation trade was powered by a rally in global crude oil markets and bets on further fiscal stimulus as the Democratic Party secured control of the United States Congress.

By end-January, the MGS yield curve steepened as yields along the 2y5y curve fell by 3bps to 6bps while longer-term yields rose by 1bp to 14bps. Demand for short-term MGS continued to persist as some investors believed that another OPR cut is still viable. Meanwhile, demand for long-term MGS was dampened by sluggish domestic demand. Both the 3y and 10y MGS were last quoted at 1.84% (Dec: 1.88%) and 2.71% (Dec: 2.65%). The 10y/3y MGS yield spread widened to 86bps (Dec: 77bps). MGS trading volume rose by 66.9% to RM45.4 billion (Dec: RM27.2 billion).

Despite the poor yield performance seen in MGS due to sluggish domestic demand, the local bond market managed to rake in a total net foreign inflow of RM3.7 billion (Dec: RM3.6 billion), bringing total foreign holdings to RM226.7 billion which is equivalent to 13.9% of total outstanding local bonds. MGS received most of the foreign inflows in January with foreign investors buying into January's dip as Malaysia remains in a deflationary environment with the December Consumer Price Index recording a decline of 1.4% y-o-y. Foreign sentiment also remained positive as Malaysia's sovereign rating was affirmed at A3/Stable by an international rating agency.

Foreign holdings of MGS surged by RM2.3 billion (Dec: RM2.4 billion) to RM179.6 billion, which is equivalent to 40.5% (Dec: 40.6%) of total outstanding MGS. The bulk of the foreign demand for MGS was mostly concentrated along the belly until the long end of the curve given positive yield differentials, in comparison with USTs along the 1y3y curve which declined by 6bps to 15bps. Positive yield differentials at the short end only declined by 1bp to 6bps.

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