MGS yields rise in November on vaccine hope


MALAYSIAN government securities (MGS) yields were higher in November as investors continued to buy into Asian bonds albeit at a slower pace in hopes that a global vaccine breakthrough would result in a faster economic recovery for the region.
The Malaysian Rating Corp Bhd (MARC) in a statement today said MGS yields along the three-year to 15-year curve were higher by 15 basis points (bps) to 24bps, while yields at the longer end were higher by 26bps to 37bps. Both the three-year MGS and 10-year MGS were last quoted at 1.91% and 2.74% respectively as at end-November.Risk-on sentiment was mainly spurred by positive news of Covid-19 vaccine breakthroughs after several vaccines have been proven effective. The improved risk appetite saw investors flocking towards riskier assets like equities.

The sentiment was also lifted by the signing of the Regional Comprehensive Economic Partnership (RCEP) pact and better-than-expected third quarter 2020 (3Q20) GDP data. Malaysia’s GDP contracted by 2.7% year-on-year in 3Q20, rebounding from the -17.1% slump in 2Q20.

Losses in MGS were impelled by the passing of Budget 2021 at the policy stage and the Employees Provident Fund’s statement that it may need to liquidate assets to fund i-Sinar withdrawals. These factors have cemented expectations of higher MGS supply for 2021.

MARC analyst Woon Khai Jhek said investors had likely priced in higher market risk arising from the myriad uncertainties over the US presidential election and domestic political turmoil that had threatened to derail the passing of Budget 2021.

“Domestic yields may have also faced upward pressure amid tighter market liquidity, as the turnover ratio for MGS and government investment issue (GII) averaged at 0.059 in November – the lowest since December 2018,” Woon said in a statement, adding that any reaction following the recent sovereign downgrade by Fitch Ratings Inc on Dec 4 appeared rather muted and short-lived.

Meanwhile, foreign investors continued to be net buyers of local bonds for the seventh consecutive month, albeit at a slower pace.

Foreign buying interest was supported by Covid-19 optimism, firmer crude oil prices and Malaysia’s ongoing deflationary environment. In October, Malaysia’s CPI inflation had come in at -1.7% YoY against -1.4% in September.

Total foreign holdings in November rose by RM1.9 billion to RM219.4 billion, equivalent to 13.6% of total outstanding – the highest level since January 2020. This was underpinned by improving sentiments and yield hunt amid low global interest rates.

MGS continued to be the major beneficiary of foreign flows, followed by GII. Foreign holdings in MGS rose by RM1.8 billion to RM175 billion, equivalent to 40.1% of total outstanding MGS.

The US dollar-ringgit exchange rate also ended the week stronger at 4.055 on Dec 11 from 4.064 the week before. Following Fitch Ratings’ downgrade, investors may be more wary of potentially similar rating actions from the other two rating agencies further down the line.

Another downside risk stems from FTSE Russell’s evaluation of Malaysia’s watchlist status at its next review in March 2021.