In line with major government bonds, local govvies ended stronger in January. Of note, the 10y yield of Malaysian Government Securities (MGS) fell below 4.0% for the first time since August 2022. Optimism over the Malaysian economy’s prospects had improved following China’s reopening, further helping the situation. This was also supported by the easing consumer price growth, which fell to a six-month low of 3.8% y-o-y in December 2022 (November: 4.0%).
After four consecutive months of net outflows totalling RM8.6 billion, ringgit bonds saw foreign investors turn net buyers to the tune of nearly RM500.0 million in January. Notwithstanding this, foreign holdings slid slightly to 13.1% of total outstanding (Dec: 13.2%), due in part to higher net issuances of government bonds with no MGS/Government Investment Issues (GII) redemptions for the second consecutive month.
Gross issuance of MGS/GII rose to RM15.0 billion in January from the previous month’s RM8.5 billion. The gains are attributed to increased issuances in both the MGS (Jan: RM5.5 billion; Dec: RM4.5 billion) and GII (Jan: RM9.5 billion; Dec: RM4.0 billion) segments.
Not surprisingly, the local bond market reacted positively to Bank Negara Malaysia’s (BNM) pause in hiking its Overnight Policy Rate (OPR) in January. BNM has indicated that given the lagged effects of monetary policy, the pause would allow for time to assess the impact of 2022’s four consecutive 25-bp hikes that had taken the OPR to 2.75%.
Amid robust economic growth and above average inflation, the door for further OPR hikes remains open. We expect BNM to continue tailoring monetary policy to minimise ringgit and capital flow volatility given that major central banks remain on a rate-tightening path, albeit less aggressively. A 25-bp OPR hike in the upcoming Monetary Policy Committee (MPC) meeting on March 8-9 is a strong possibility.