In September, the US Federal Reserve (Fed) set the stage for swifter rate hikes and commencement of its tapering plan. In its latest Federal Open Market Committee statement, the Fed upgraded its median Federal Funds Rate (FFR) projections for 2022 and 2023 to 0.3% and 1.0% (June: 0.1% and 0.6%). The median FFR in 2024 was projected to be 1.8% and the Fed warned that tapering could begin in November 2021.
Other major banks have also similarly expressed hawkish views. In the UK, the Bank of England lifted its forecast for inflation and two of its officials called for an early end to the central bank's Quantitative Easing programme. Meanwhile in Norway, the Norges Bank raised the deposit rate to 0.25% from zero, becoming the first G10 central bank to hike its policy rate following the onset of the pandemic.
The increasing hawkish tilt in policy stances by some major central banks in September has jolted global bond markets. Global government bond yields spiked along with Malaysian Government Securities (MGS). MGS yields were seen hovering near pre-COVID 19 levels. Central banks were gripped by fears of persistent inflation that have been compounded by global supply chain disruptions.
The global supply chain was choked by the inconsistent global pandemic restrictions and pace of recovery as well as other ongoing COVID-19 related regulations such as vaccine requirements. Businesses in reopened economies faced difficulties in meeting demand as some inputs were sourced from countries that are still under lockdowns. Furthermore, ongoing quarantine measures and labour shortages led to delays in the arrival of goods and clogging of trade routes.
Back in Malaysia, the government's increased appetite for debt has also pressured MGS. The government proposed to raise the national debt ceiling by 5% to 65% of GDP, raising expectations of further increase in the supply of MGS. Proceeds raised from additional debt will be used to increase the size of the COVID-19 Fund by RM45.0 billion RM110.0 billion by 2022 and finance the RM400.0 billion development spending under the 12th Malaysian Plan.
In contrast with the major central banks, Bank Negara Malaysia's (BNM) Monetary Policy Committee meeting in September was uneventful for MGS. BNM kept its dovish tone and maintained the overnight policy rate (OPR) at 1.75% as widely expected.
As at end-September, the MGS yield curve extended its bearish flattening trend from the previous month. Yields along the 3y15y curve rose by 13bps to 25bps while both the 20y and 30y yields only rose by 6bps to 7bps. The monthly trade volume surged to RM39.9 billion (Aug: RM31.9 billion).
MGS saw huge net foreign outflows in September. Foreign holdings of MGS fell by RM2.4 billion (Aug: +RM3.1 billion) to RM189.3 billion (Aug: RM191.7 billion). Foreign ownership of MGS remained at 40.3% of total outstanding. Foreign demand for MGS was partly offset by the large redemption that occurred in the same month at RM11.7 billion.
The sell-off was mostly concentrated along the belly of the curve. The positive differentials against US Treasuries along the 5y10y curve widened by 17bps to 25bps. Meanwhile, positive differentials at the short and long ends only widened by 1bp to 13bps.
YTD, foreign interest in MGS remains strong despite the global bond sell-off in September. Cumulative net foreign inflows for January-September 2021 amounted to RM12.0 billion (Jan-Sep 2020: RM5.3 billion). MGS was the largest contributor for foreign net inflows for 2021YTD so far.
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