The local bond market continued to record net foreign inflow for the third consecutive month, albeit at a declining magnitude in February. The ongoing military conflict between Ukraine and Russia raised the safety demand for bonds as haven assets. Foreign investors remained as net buyers although total net foreign inflow narrowed to RM3.1 billion (Jan: RM 3.5 billion).

Malaysian Government Securities (MGS) recorded a smaller net foreign inflow of RM495 million (Jan: RM4.6 billion) compared with Government Investment Issues (GII) inflow of RM1.6 billion (Jan: -RM321 million). Meanwhile, corporate bonds registered a net foreign inflow of RM114 million. Nevertheless, only Malaysian Islamic Treasury Bills (MITB) showed an outflow of RM157 million (Jan: -RM637 million).

Foreign holdings' share in MGS/GII diluted to 25.8% (Jan: 26%) amid higher issuances of local govvies and that no government bonds matured in February. On the other hand, share of foreign holdings in corporate bonds remained stationary at 1.8% of total outstanding. Overall, the total foreign holdings' share of total outstanding increased slightly to 14.9% (Jan: 14.8%).

Total MGS/GII outstanding grew 11.9% y-o-y to close at RM930.3 billion in February 2022 as no government bonds matured for the third consecutive month. Gross issuance throughout the month came in higher at RM14.5 billion (January 2022: RM12.5 billion), lifted by the GII segment at RM9.5 billion. (January 2022: RM3.0 billion). This is notwithstanding the lower issuance of MGS at RM5.0 billion compared with RM9.5 billion recorded in the previous month.

February was an eventful month as investors were kept occupied by a slew of economic data and geopolitical developments, which saw local govvies ended on a mixed note. The latest inflation print showed that headline inflation eased in January 2022 to 2.3% from 3.2% in the previous month. Such a slowdown confirmed BNM's view that inflation would remain moderate as the base effect from fuel inflation dissipates. That said, inflation is still subject to retail oil prices amid heightened risks from supply-side disruptions. This scenario, in addition to the safety bids spurred by the Russia-Ukraine military conflict, is compressing yields on the left- and the right-end of the curve lower.

The 3y MGS yield dropped the most to settle at 2.71% from 2.84% previously, while yields along 10y20y curve eased 1bp to 3bps. Meanwhile, the weak auction results hurt bidding interest for the 5y and 7y MGS, with yields closing 1bp and 7bps higher, respectively.

The full report can be accessed here.