Yields on Malaysian Government Securities (MGS) across the curve continued to tighten in February as economic sentiment moderated following the release of the 4Q2019 GDP numbers and the government’s downgrade Malaysia’s GDP growth pace to between 3.2% to 4.2%. These events gave support for the current low yield levels and raised expectations of further easing in the overnight policy rate (OPR). The risk-off sentiment is further strengthened by the relentless spread of the COVID-19 outside China and the government’s announcement of a stimulus package for 2020.

As of end-February, MGS yields were lower by 17bps to 36bps. With most of the gains recorded between the front-end till the belly of the curve, the yield curve had steepened. At the front-end, the 3y MGS shed 27bps to 2.62% (January: 2.88%); at the back-end, the 20y shed 17bps to 3.24% (January: 3.41%). As a result, the 20y/3y yield spread widened to 63bps (January: 52bps). Meanwhile, the 10y yield fell 31bps to 2.83% (January: 3.13%), the lowest level ever recorded and below its key psychological level of 3.00%.

Corporate bond benchmark yields also drifted lower on continued strong interest, especially in quasi-government, as well as AAA and AA-rated bonds. Benchmark yields for AAA, AA and A-rated fell by between 12bps and 37bps, compared with January’s fall of between 13bps and 32bps, and the AAA, AA, A blended credit spreads widened on average by between 1bp and 10bps along the 3y15y curve.

However, foreign investors were net sellers of local bonds in February despite the resilient local bond market, suggesting support from onshore investors. Foreign holdings moderated by RM8.1 billion to RM200.1 billion (January: RM208.2 billion), equivalent to 13.1% (January: 13.8%) of total outstanding local bonds. The decline was mainly attributed to the reduction in foreign holdings of MGS, which fell by RM7.1 billion to RM160.1 billion (January: RM167.2 billion). Consequently, the foreign share of total outstanding MGS fell to 39.6% (January 41.7%).

In early March, BNM had trimmed the OPR for the second consecutive time this year – the first was in January - by another 25bps to 2.50%, which is the lowest level since GFC. Hot on the heels of BNM’s OPR cut, the US Federal Reserve also announced a cut of 50bps in its Federal Funds Rate. We expect global central banks’ dovish stance to drive yields even lower in March.

Contacts:
Tan Jack Fong, +603-2717 2958/ jackfong@marc.com.my;
Ummi Kalsom Yaacub, +603-2717 2934/ ummikalsom@marc.com.my;
Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my.