Posted Date: December 15, 2021

After three consecutive months of positive net foreign flow, the local bond market foreign flow migrated to negative territory in November. The local bond market suffered from sell-offs as the net foreign outflows plummeted to RM3.5 billion (October: +RM2.9 billion) as investors reacted to the hawkish stance and the prospect of policy tightening by the US Federal Reserve (the Fed). The share of foreign holdings diluted in November to 14.4% (October: 14.7%) of total outstanding as the foreign holding magnitude declined to RM250.4 billion (October: RM254.0 billion). Foreign outflows were dragged by the enormous outflow of Malaysian Government Securities (MGS) of RM4.8 billion in November (October: +RM2.7 billion). The high redemption value in November also contributed to the net foreign outflows. As a result of the net foreign outflow, ringgit depreciated to RM4.2265 against the USD in November (October: RM4.1440).

The emergence of the COVID-19 Omicron variant at the end of November flattened yield curves across global markets. The Fed hinted that it will accelerate the pace of tapering of asset purchasing as high inflation grappled the US economy. The Fed also retired from describing inflation as transitory as it has been more persistent and higher than expectations. However, in the EU, the European Central Bank stood by its view that inflation is transitory. Meanwhile, the Bank of England (BoE) tilted towards a dovish stance due to uncertainties over the impact of the Omicron variant on their economy.

Lesser issuances and higher redemptions caused the local government bond market to slow down with total outstanding MGS/Government Investment Issues (GII) amounting to RM895.3 billion as of end-November 2021. In November, gross issuances declined by RM1.1 billion to RM15.9 billion (October: RM17.0 billion) mainly due to lower issuances in the GII segment (November: RM4.5 billion; October: RM8.0 billion). On the other hand, new issuances in the MGS segment were elevated to RM11.4 billion (October: RM9.0 billion), driven by switch auctions, but was outpaced by a relatively high volume of maturities at RM13.9 billion.

The advent of the Omicron variant led to renewed haven demand for local govvies as at the end of November. Investors were inclined towards bonds with longer maturities, driving the 15y and 30y MGS yields to drop by 17bps and 14bps m-o-m. The hefty gains showed that investors shrugged off the uptick in the country's October inflation rate to 2.9% (Sep: 2.3%).

In the meantime, yields in the short-tenure space remained anchored as Bank Negara Malaysia (BNM) signalled no imminent changes in the key policy rate during its November Monetary Policy Committee (MPC) meeting. BNM has maintained the overnight policy rate (OPR) at a historical low of 1.75% since May 2020. In an accompanying statement, BNM reiterated that the current monetary policy stance is accommodative and that its future monetary policy stance will be data dependent. It is also worth noting that BNM's assessment on the economic outlook was essentially unchanged from the previous MPC statement.

The full report can be accessed here.

Lyana Zainal Abidin, +603-2717 2912/ norlyana@marc.com.my;
Lee Si Xin, +603-2717 2942/ sixin@marc.com.my;
Firdaos Rosli, +603-2717 2936/ firdaos@marc.com.my.