Posted Date: April 21, 2021

Major global bond markets ended mixed in March. Government bonds in the US and the UK saw their yields rising throughout the month amid continued progress in vaccine rollouts and fresh fiscal stimulus. Both the US Federal Reserve and the Bank of England left their key policy rates and pace of bond purchases unchanged. In contrast, euro zone government bond yields drifted lower in March amid renewed pandemic fears due to rising cases of new variants and suspension of the AstraZeneca vaccine. The European Central Bank's move to increase the pace of its bond purchases also pushed euro zone government bond yields downwards.

In China, yields on government bonds fell amid safe-haven demand from domestic investors as China's blue-chip CSI300 index went into correction territory. The risk appetite of domestic investors worsened in March amid China's renewed deleveraging campaign, antitrust crackdown and escalating tensions with the West. Meanwhile, foreign holdings of China's government bonds fell for the first time in March since February 2019 amid narrowing spreads over US Treasuries and a weaker yuan. The foreign sell-off was partly mitigated by FTSE Russell's decision on March 29, 2021, to go ahead with its plan to include China in the WGBI beginning October 2021.

In Malaysia, sentiment for Malaysian Government Securities (MGS) remained weak in March with the yield curve bear flattened. MGS yields along the 1y9y curve surged by 23bps m-o-m on average amid Bank Negara Malaysia's shift into a more neutral policy stance. Unlike Indonesia's 25bps rate cut, Malaysia's policy rate was left unchanged. Meanwhile, MGS yields at the longer end, which rose on average by 16bps, were pressured by the US bond market rout and concerns of additional new debt supply following the announcement of the PEMERKASA stimulus programme.

However, MGS yields retraced lower in the final week of March when FTSE Russell removed Malaysia from its negative watchlist and retained Malaysia's membership in the WGBI. By end-March, both the 3y and 10y MGS yields rose by 19bps and 18bps m-o-m to 2.13% and 3.27% (Feb: 1.94% and 3.09%).

In tandem with MGS, generic AAA, AA and A yields also spiked. Investors are expecting inflation to pick up at a quicker pace this year, diminishing the returns on bonds, especially for AAA and AA-rated corporate bonds due to their small credit spreads above MGS. In March, generic AAA and AA yields along the 3y15y curve (credit spreads: 56bps to 112bps) surged by 34bps to 53bps while generic A yields (credit spreads: 200bps to 228bps) rose by 12bps to 25bps.

Despite the yield surges experienced by Malaysian bonds, the local bond market continued to attract net foreign inflows, albeit at a slower pace. This suggests that on an aggregate basis, domestic investors were once again net sellers of local bonds in March. Total net foreign inflows amounted to RM5.9 billion (Feb: RM7.2 billion), bringing total foreign holdings to RM239.7 billion, an equivalent of 14.5% of total outstanding local bonds.

By instrument, Government Investment Issues (GII) attracted the largest inflow (+RM2.9 billion) followed by Malaysian Islamic Treasury Bills (+RM1.6 billion) and MGS (+RM1.5 billion). The inflows into GII were most probably concentrated along the long end of the curve amid the flattening of the GII curve and strong reception of the 20.5y GII 09/41 new issue at auction. By end-1Q2021, the local bond market garnered a total net foreign inflows of RM16.7 billion (1Q2020: -RM16.9 billion).

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