MGS yield curve steepens due to nationwide lockdown


THE Malaysian Government Securities’ (MGS) yield curve for the four-year to 30-year curve surged between 1 basis point (bp) to 15bps month-on-month by end May due to a full nationwide lockdown that was announced on May 28.

The Malaysian Rating Corp Bhd (MARC) stated that the long-term yield curve was also impacted by the number of Covid-19 cases which started picking up to unprecedented levels, leading to increased calls for stricter mobility measures and raised expectations of further fiscal stimulus.

The rating agency added that MGS yields were also pressured by heightened inflation pressure as the country’s April Consumer Price Index came in higher at 4.7% year-on-year compared to 1.7% in March.

“MGS started the month on a positive momentum with yields declining across the board during the first week.

“Demand was supported by risk-off sentiment emanating from local investors on the back of rising Covid-19 cases and introduction of the third Movement Control Order (MCO 3.0),” it said in a statement yesterday.

The rating agency added yield on the 10-year MGS fell to 3.03% on May 5, the lowest level in two months and ahead of Bank Negara Malaysia’s (BNM) May Monetary Policy Committee meeting.

BNM’s decision to maintain the Overnight Policy Rate at 1.75% had little impact on the MGS as it was largely priced-in.

MARC noted that yields at the shorter end of the curve fell between 5bps to 6bps as the full nationwide lockdown revived dovish bets.

Yields on the three-year and ten-year MGS were last quoted at 2.31% and 3.24% respectively (April: 2.37% and 3.15%).

Monthly trade volume dwindled to RM33.3 billion (April: RM42.9 billion) as investors were seen waiting on the sidelines ahead of the US Federal Reserve’s Federal Open Market Committee meeting in June for concrete clues of future tapering plans.

In the corporate bonds market, MARC noted that their yields were mixed in May as investors took defensive positions throughout the month as generic AAA rated yields were broadly lower by 1bp to 5bps along the three-year to 10-year curve.

It noted that yields on lower rating bands were broadly higher, especially the A-rating band. Credit spreads for the generic AAA and AA-rated spectrum were broadly tighter especially for the five- and seven-year tenures in May.

“This was mainly due to a higher surge in MGS yields. Credit spreads for the generic A-rated corporate bonds have widened amid elevated risk-off sentiment in domestic markets,” it said.

“It was the lowest monthly pace since September last year. Total foreign holdings rose by RM1.9 billion (April: +RM6.4 billion) to RM247.9 billion, equivalent to 14.7% (April: 14.8%) of total outstanding local bonds,” MARC stated.

Cumulative inflows from May 2020 until May 2021 amounted to RM62.1 billion compared to the post Global Financial Crisis 2010/2011 period of RM67.9 billion.

Moderation in foreign demand for local bonds was due to fears of a taper tantrum in the US, heightened inflation expectations and the announcement of a full lockdown in Malaysia which worsened the fiscal outlook and raised debt supply pressure, it added.

The foreign inflows in May were primarily supported by inflows into MGS (+RM2.4 billion).

Foreign holdings of MGS amounted to RM191.7 billion, equivalent to 41.1% of total outstanding MGS (April: 41.0%).

Year-to-date, cumulative net foreign inflows into the local bond market amounted to RM25 billion (January-April 2020: -RM17.4 billion), surpassing total foreign inflows in 2020 which amounted to RM18.3 billion.

Cumulative inflows from May 2020 until May 2021 amounted to RM62.1 billion, comparable to during the post-global financial crisis 2010/2011 period of RM67.9 billion amid massive quantitative easing programmes.

“This was the longest monthly streak of foreign inflows in history,” MARC said.