Posted Date: December 28, 2022
In September, heavy selling pressure amid the global bond rout pushed local government bond yields higher across all maturities. Global financial markets were rattled by stubbornly high inflation, which spurred market expectation of more aggressive monetary tightening ahead after being flagged by major central banks.
Because of the selloff, yields of Malaysian Government Securities (MGS) surged by between 36 bps and 47 bps m-o-m along the 3y20y curve. Of note, the 3y MGS yield jumped 45 bps to settle at 3.78%, the highest in more than five years. Given that the magnitude of the MGS yields surge was relatively smaller than those of US Treasuries, the US-Malaysia yield spread narrowed.
Not surprisingly, net foreign flows into the local bond market turned negative to -RM439.0 million in September after recording an inflow of RM5.6 billion in August. Consequently, cumulative foreign flows year-to-date fell deeper into negative territory to -RM1.6 billion. 
It is worth noting that the net foreign outflow was mainly driven by higher redemptions of MGS, which outpaced net foreign buying of Government Investment Issues (GII) (RM80.7 million) and Malaysian Islamic Treasury Bills (RM2.2 billion). Corporate bonds had also registered net foreign inflows (September: RM141.4 million; August: RM69.0 million).
Notwithstanding the bond market selloff, the sale of the RM4.5 billion 15.5y new issue of Sustainability GII drew decent demand with a bid-to-cover ratio of 2.4x. It is a significant fact that the issue is the first of its kind in the local government bond market.
Following the 25-bp Overnight Policy Rate (OPR) hike in September, we expect Bank Negara Malaysia to remain on a rate tightening path and lift the OPR by at least another 25 bps in November. 
There are three reasons for this. First, we see risk of the demand-pull side of the inflation equation, given the improving short-term domestic growth outlook, manifesting itself stronger going forward. The second reason is that global inflationary pressures will likely persist from continued disruptions to commodities markets. And finally, the ringgit could remain under pressure in the coming months amid higher interest rate in the US. 
The full report can be accessed here.
Lee Si Xin, +603-2717 2942/ sixin@marc.com.my
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my