In 1H2021, fiscal support to mitigate the impact of stricter lockdown measures caused the gross issuance of Malaysian Government Securities (MGS)/Government Investment Issues (GII) to rise by 3.5% y-o-y to RM80.5 billion. Consequently, the MGS yield have steepened with yields along the 7y20y curve surged by between 62bps to 79bps while yields along the 3y5y curve surged by between 38bps to 43bps. Notably, the expectation of declining buying support from the Employees Provident Fund (EPF) has caused yields to rise.

MGS yields have been rising on a steepening bias across all tenures in recent weeks. Given ongoing debates regarding tapering programmes from global central banks, heightened inflationary pressure, growing new supply of MGS, and waning buying support from the EPF, this trend should continue for the rest of the year. For full year 2021, we expect the benchmark yields on the 10y MGS to reach to between 3.50% and 3.60%.

Based on current developments, we expect the gross issuance of MGS/GII to come in at between RM170.0 billion and RM180.0 billion for 2021. This would be the highest annual gross issuance amount in recorded history. Failure to contain the pandemic, however, will necessitate increasing further the supply of MGS/GII to finance economic support measures in the near term. Assuming that total fiscal direct injections reach 2020's RM55.0 billion, gross issuance of MGS/GII this year could reach between RM200.0 billion and RM210.0 billion.

Meanwhile, the gross issuance of corporate bonds rose a staggering 53.0% y-o-y to RM59.5 billion in 1H2021. This surge can be explained in part by the historical low overnight policy rate of 1.75% — in place since July 2020 — and the expectation of an economic rebound. Corporate bond issuances will likely come in at between RM100.0 billion and RM110.0 billion (2020: RM104.6 billion). This assumes that the prospects of an economic recovery remain intact and that business confidence and consequently private investments continue to rise.

It is important to note that risks remain tilted to the downside given the spike in COVID-19 cases and prolonged tight lockdowns. A lot will depend on the ongoing vaccination programme and the overall impact of fiscal stimulus packages.

Concerns have been raised over the government's weak finances and high debt. Given the dire economic and social impact from prolonged lockdowns, we think that the government has limited policy options at hand. Spending on economic support measures should continue amid a negative output gap. As a developing economy, we believe that fiscal austerity can only add further damage to Malaysia's economic and social fabric, and subsequently our long-term economic progress. While many other nations find themselves in the same fiscal boat as Malaysia, the government should be bold in securing the nation's future prosperity.

The 1H2021 Bond Market Update report can be accessed in full here.