Posted Date: September 1, 2021

In July, as the global pandemic crisis deepens, global government bonds including Malaysian Government Securities (MGS) have rallied. MGS performance mimicked the US Treasury market as investors flocked towards safe-haven assets. The rally was spurred by the rapid spread of the COVID-19 Delta variant, amplifying expectations the US economic growth has moved past its peak. Investors scaled back their expectations for how quickly the US Federal Reserve would raise rates amid a more uncertain economic outlook.

Domestic COVID-19 cases were also on a rise, causing great uncertainty towards Malaysia's economic recovery prospects. Most of the buying support came from local investors as foreign holdings of MGS fell due to a large redemption value of RM13.5 billion. As such, net issuance of MGS fell to -RM8.5 billion (Jun: RM9.0 billion) with gross issuance of MGS coming in at RM5.0 billion (Jun: RM9.0 billion).

Foreign holdings of MGS reduced by RM3.6 billion to RM188.6 billion (Jun: RM192.1 billion), equivalent to 40.4% of total outstanding MGS (Jun: 40.4%). Negative net foreign inflows into local bonds widened in July to RM4.9 billion (Jun: -RM1.7 billion), dragging the total foreign holdings down to RM243.8 billion (Jun: RM247.4 billion). Foreign investors held 14.3% of total outstanding local bonds (Jun: 14.6%).

MGS also garnered support from Bank Negara Malaysia's (BNM) continued accommodative monetary policy stance. BNM kept the overnight policy rate unchanged at 1.75% for the sixth time in its July Monetary Policy Committee meeting. Local investors expect BNM to be dovish for longer as Malaysia's economy is still being hampered by stricter movement restrictions in major localities and an overwhelming number of domestic COVID-19 cases since June.

Despite Malaysia's rising vaccination rates and optimism that more states will move to Phase 2 of the National Recovery Plan in August, MGS yields remained suppressed. Local investors continued to favour MGS throughout the month as Selangor and KL remained in enhanced lockdown.

Towards the final week of July, MGS yields started rising, albeit slowly, amid the reconvening of Parliament and the end of the state of emergency. Meanwhile, MGS did not react towards the June Consumer Price Index (CPI) print released on 23 July. CPI growth in June grew at a slower pace at 3.4% y-o-y compared to the May CPI growth print of 4.4%, confirming that the surge in inflation was transitory.

By end-July, the MGS yield curve bullishly flattened compared to the previous month. MGS yields at the long end of the curve along the 15y30y curve fell between 14bps to 21bps. MGS yields at the shorter end along the 1y10y curve fell between 1bp to 11bps except for the 4y and 5y MGS yields, which rose by 3bps and 7bps. Yield on the 10y MGS fell 11bps to 3.17% (Jun: 3.29%). Meanwhile, the monthly trade volume declined to RM42.8 billion (Jun: RM54.1 billion).

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