February saw a second consecutive month of net foreign inflows into local govvies, which surged 840% to RM4.7 billion from January’s RM0.5 billion. Consequently, foreign holdings of MGS and GII increased by RM4.0 billion and RM1.0 billion (Jan: RM1.3 billion; RM1.4 billion).

Despite February’s net foreign inflows into local govvies, foreign holdings inched lower to 21.8% from January’s 21.9%, thanks to higher net issuances. In February, gross issuance of MGS/GII had risen by 40% to RM21.0 billion from January’s RM15.0 billion amid strong public demand. The gains were led by higher MGS issuances (Feb: RM10.5 billion; Jan: RM5.5 billion). With zero MGS/GII redemptions, total MGS/GII outstanding had risen further to RM1,036.5 billion (Jan: RM1,015.5 billion).

Of the RM21.0 billion worth of local govvies issued in February, RM16.5 billion was raised through four public offerings of MGS/GII while the remaining RM4.5 billion came from private placements, viz. the RM2.5 billion 20.5y new issue of GII and the RM2.0 billion Sustainability 15y GII reopening. The public offerings’ average BTC ratio of 2.2x reflected solid bidding interest, albeit lower than the 2.8x recorded in January.

Amid surging global bond yields, local govvies had also succumbed to selling pressure in February. The weak ringgit, which had fallen by 5.3% against the USD to end the month at 4.48, also added to the negative sentiment. MGS yields climbed across all maturities, though not as much as UST yields given growing market expectation that BNM will keep its Overnight Policy Rate (OPR) unchanged at 2.75% at its March 8-9 MPC meeting. This expectation proved correct.

Going forward, we expect BNM to continue maintaining its OPR at 2.75% for the rest of the year. This is because besides the economic outlook remaining tilted to the downside, fears of a deepening crisis for banks worldwide could lead to further episodes of heightened financial market volatility and vulnerability with adverse implications for the economy.

In the meantime, we are maintaining our 2023 GDP growth forecast at 4.2%. The latest available data show headline inflation for January coming in at a softer pace of 3.7% (December 2022: 3.8%). The expected continued moderation of Malaysia’s headline inflation should also give BNM little incentive to hike its OPR further going forward.