Posted Date: August 25, 2022
Local govvies mostly rallied in July, reflecting the movements in major government bond markets. Major government bond yields were lifted by stronger haven demand as concerns about a recession escalated after a recent stream of economic data, from the US to Europe, flashed signs of a slowing global economy. On the local front, encouraging government bond auction results somewhat boosted the sentiment. Consequently, Malaysian Government Securities (MGS) yields were compressed lower by 16 bps to 42 bps for the month along the 5y20y curve. Of note, the 10y MGS yield settled at 3.90%, about 50 bps lower than the peak of 4.40% recorded in mid-June.
Meanwhile, the 3y MGS yield was up 1 bp to end at 3.50% amid expectations of an overnight policy rate (OPR) hike by Bank Negara Malaysia (BNM), resulting in a flatter yield curve. After delivering a 25 bps hike in May, the first in more than four years, BNM followed up with another 25 bps increase in the OPR to 2.25% at its Monetary Policy Committee meeting on July 6, 2022. The OPR hike had been widely expected as BNM had signalled policy normalisation amid a widened rate differential between the US and Malaysia.
However, the current OPR remains 75 bps below the pre-pandemic level and is still supportive of economic growth, in our view. Moving forward, prospects of higher interest rates externally, the weakened ringgit and rising inflation risks will keep BNM on a monetary tightening path. With the forward-looking indicators suggesting solid growth in the near term, we expect the ongoing consecutive rate hike to continue to 2.75% by year end so long as the rate gap is a concern.
The total amount of MGS/Government Investment Issues (GII) outstanding shrank in July to RM958.8 billion (June: RM962.3 billion) due to a higher volume of redemption valued at RM19.0 billion (June: none). However, the gross issuance of MGS/GII came marginally higher at RM15.5 billion (June: RM15.0 billion). The increase was driven by the stronger GII issuance valued at RM10.5 billion (June: RM4.5 billion). This is notwithstanding the lower issuance in the MGS segment valued at RM5.0 billion (June: RM10.5 billion).
Foreign holdings of local bonds recorded another month of outflows amid higher redemption of MGS/GII valued at RM19.0 billion and narrowing yield differential with the US. In July, the local bond market logged foreign outflows of RM3.5 billion, albeit smaller than in the previous month (June: -RM4.1 billion). The net foreign outflows were mainly derived from MGS at RM3.3 billion (June: -RM864 million), followed by GII at RM1.4 billion (June: -RM3.4 billion). Corporate bonds also registered net foreign outflows amounting to RM187.1 million (June: -RM87.7 million). Meanwhile, Malaysian Islamic Treasury Bills (MITB) is the only segment that recorded net foreign inflows of RM1.3 billion (June: +RM1.2 billion).
Total foreign holdings continued on a downtrend at 13.7% in July (June: 14%). The share of foreign holdings in MGS dropped significantly to 35.5% in July (June: 36.5%) following the net foreign outflows. Other segments of local government bonds also saw a diluted share of foreign holdings. For the first seven months of 2022, cumulative foreign flows in the local bond market continued to be in negative territory at a larger scale of RM6.8 billion (Jan-Jul 2021: +RM20.8 billion).
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