The local bond market saw the fifth consecutive month of net foreign inflows at RM3.0 billion in May, higher than the RM1.5 billion recorded in the prior month. The solid foreign demand reflected the attractiveness of local bonds amid the anticipated moderation in inflation this year. Local govvies continued to attract foreign interest with net foreign inflows of RM3.3 billion (Apr: RM1.4 billion), while local corporate bonds saw net foreign outflows of RM0.3 billion for the month (Apr: +RM90 million). Overall, foreign holdings of total outstanding bonds remained steady at 13.6%.

Gross issuance of Malaysian Government Securities (MGS)/Government Investment Issues (GII) remained firm at RM15.0 billion in May, supported by the RM9.5 billion issuance in the MGS segment. Meanwhile, the GII saw a RM13.0 billion redemption for the month. As gross issuance was higher than redemption, outstanding MGS/GII inched up to RM1,035.6 billion from April’s RM1,033.6 billion.

While the local govvies rallied in the previous two months against the backdrop of falling US Treasury (UST) yields, it ended May on a mixed note. Demand for medium-term government bonds remained steady, with MGS yields along the 7y to 10y part of the curve declining by three bps. The strong gross domestic product (GDP) growth of 5.6% (consensus: 5.1%) in 1Q2023 could mark an interim peak in growth, which led to forward expectations for slower growth and inflation, supporting the bond market. Meanwhile, yields on the front end and long-term MGS rose by between one bp and seven bps, tracking the rise in the OPR and upward movements in UST yields.

On the inflationary front, core and headline inflation are on track to continue easing from the higher base last year. We project inflation in 2023 to soften to 2.8% (2022: 3.3%). This, together with Bank Negara Malaysia’s (BNM) latest 25-bp OPR hike to 3.00% in May, suggest that the current rate tightening cycle could have reached its final phase. We thus expect BNM to maintain the OPR at 3.00% for the remainder of the year. This would bode well for investor sentiment and lend further support for the local bond market going forward.