Posted Date: April 22, 2022

After recording net foreign inflows in the first two months of 2022, the local bond market experienced massive net foreign outflows of RM4.0 billion in March (Feb: +RM3.1 billion) amid a hawkish chorus by the US Federal Reserve (Fed) in quelling red-hot inflation. The local government bond market suffered sell-offs as the foreign holdings' composition in local govvies fell to 25.1% in March (Feb: 25.5%). In totality, the share of foreign holdings in the local bond market plummeted to 14.7% (Feb: 14.9%). However, the ringgit only depreciated slightly to RM4.2040 against USD in March (Feb: RM4.2010) buoyed by high commodity prices.

The Fed increased the Federal Funds Rate (FFR) by 25bps in March 2022, the first rate hike since December 2018 to address spiralling inflation. Investors expect bigger FFR hikes by 50bps in the next Federal Open Market Committee meetings. The Fed's preferred inflation gauge, personal consumption expenditures (PCE), went up to a new high of 6.4% y-o-y in February (Jan: 6.2%), derived from higher food and energy prices.

In March 2022, the total Malaysian Government Securities (MGS)/ Government Investment Issues (GII) outstanding shrank to RM926.3 billion from RM930 billion recorded in the preceding month. The drop was due to a surge in the volume of matured papers to RM17.5 billion (MGS: RM10.7 billion; GII: RM6.8 billion) after three consecutive months of zero redemption. Gross issuance also came in slightly lower at RM13.5 billion (February: RM14.5 billion), dragged down by the GII segment which came down to RM5.0 billion (February: RM9.5 billion). This is notwithstanding the higher issuance of MGS amounting to RM8.5 billion (February: RM5.0 billion).

Not immune to the global bond rout, local govvies came under heavy selling pressure, with yields closing the month at the highest level in more than two years. Inflation accelerated in major economies, sparking concerns of more aggressive interest rate hikes, which intensified jitters among bond investors. On a month-on-month basis, MGS yields surged by 13bps to 47bps across all maturities. Notably, the 3y MGS rose the most to settle at 3.18% from 2.71% in the previous month. This saw the MGS 10y/3y spread narrowing to 69bps, the lowest since August 2020.

Meanwhile, as widely expected, BNM held the overnight policy rate (OPR) unchanged at the historical low of 1.75%. BNM reiterated its cautious stance, contrary to the hawkish pivots by the Fed, as the domestic economic recovery remains moderate and uneven. In the release of its Economic and Monetary Review 2021, the central bank slightly lowered its growth forecast for Malaysia's GDP to range between 5.3%–6.3% from 5.5%–6.5% previously. We maintain our view that abrupt changes in monetary policy are unlikely, and the monetary settings will remain sufficiently accommodative for some time. Otherwise, based on available data, we opine that BNM's lift-off would only occur during 2H2022, and the quantum of rate hikes would be gradual.

The full report can be accessed here.

Lyana Zainal Abidin, +603-2717 2912/ norlyana@marc.com.my
Lee Si Xin, +60-2717 2942/ sixin@marc.com.my
Firdaos Rosli, +603-2717 2936/ firdaos@marc.com.my