Posted Date: May 27, 2021

The local bond market sustained positive net foreign inflows for the 12th straight month in April. Total foreign holdings in April expanded by RM6.4 billion (Mar: +RM5.9 billion) to RM246.1 billion, equivalent to 14.8% (Mar: 14.5%) of total outstanding local bonds. Malaysian Government Securities (MGS) received most of the inflows in April at RM4.7 billion, accounting for 74.5% of total net foreign inflows. Foreign holdings of MGS amounted to RM189.3 billion, equivalent to 41.0% of total outstanding MGS (Mar: 40.8%).

The MGS yield curve had flattened significantly in April with the 10y/3y MGS yield spread narrowing to 78bps (Mar: 114bps). From beginning until mid-April, MGS yields along the belly till the long end fell as demand was largely supported by continuing optimism surrounding FTSE Russell's reaffirmation of Malaysia's membership in the World Government Bond Index. Other factors included lower US Treasury yields, firmer crude oil prices and the extension of mobility restrictions on most states.

The 10y MGS shed 18bps to 3.09% as at April 20 from 3.27% as at end-March. Meanwhile, the 3y MGS at the short end hovered within the narrow range of 2.12% to 2.14% during the same period. The 3y MGS was anchored by growing expectations that Bank Negara Malaysia (BNM) will hold the overnight policy rate (OPR) at 1.75% for the rest of 2021. On May 6, BNM kept the OPR unchanged at 1.75%.

However, MGS yields started surging during the final eight days of trading in April. Investors were mainly concerned about the government's approval to the amendments on the National Trust Fund (KWAN) Act 1988 that saw the 3y MGS yield jump 15bps in a single day. The amendments allow for funds from KWAN to be used to procure vaccines and other related expenditure. A total of RM5.0 billion from KWAN will be used. MGS yields were further weakened by the spike in the March 2021 CPI growth and nervous sentiment ahead of the US Fed's April Federal Open Market Committee meeting. Yields on both the 3y and 10y MGS ended the month at 2.37% and 3.15% (Mar: 2.13% and 3.27%).

Meanwhile, foreign holdings of Government Investment Issues (GII) expanded at a slower pace by RM0.4 billion (Mar: +RM2.9 billion) to RM31.2 billion, equivalent to 8.2% of total outstanding GII (Mar: 8.0%). This was likely due to the shift in sukuk demand towards Malaysia's US$1.3 billion USD sustainability sukuk which recorded a bid-to-cover ratio of 6.4x. The sukuk's successful reception demonstrates ongoing strong appetite for Malaysian debt. Malaysia is also the world's largest sukuk market with total outstanding of around US$287.0 billion YTD, an equivalent of 40.0% of global total outstanding.

In the primary market, gross issuance of MGS/GII decelerated to RM13.5 billion in April (Mar: RM16.5 billion), with MGS worth RM9.0 billion and GII worth RM4.5 billion being issued. YTD, gross issuance of MGS/GII amounted to RM54.0 billion, up RM2.8 billion compared to the same corresponding period in 2020. For 2021, MARC expects gross issuance of MGS/GII to be around RM155.0 billion to RM165.0 billion, taking into account further upside risk to the budget deficit, the PEMERKASA stimulus, proceeds from the USD sustainability sukuk, and the withdrawal from KWAN.

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