KUALA LUMPUR: Malaysian Government Securities (MGS) yields fell in August as central banks in several Asian countries cut their key interest rates and increased the pressure on Bank Negara Malaysia to follow suit.
Malaysian Rating Corporation (MARC) said on Thursday the central banks in Thailand, India, Indonesia and the Philippines cut their interest rates, taking their lead from major central banks amid increasing worries of a slowdown in the global economy.
“Exacerbating the situation is the inversion of the 2y10y US Treasury (UST) yield curve, which sent a strong signal that a recession could be on the horizon.
“Investors increasingly believe that the US Federal Reserve (Fed) would be forced to cut rates soon to normalise the UST yield curve.
“MGS yields were also down on Bank Negara’s announcement of new measures to further liberalise the foreign exchange administration (FEA) and as well as its positive engagement with FTSE Russell, ” it said.
MARC pointed out despite these events, the carry trade theme did not resume in August.
Gains in the MGS market were mostly contributed by local institutional investors as foreign appetite for MGS had lost traction in August.
Foreign holdings of MGS dipped by RM1bil to RM153.7bil amid the re-escalation of US-China trade tensions.
However, MARC said Bank Negara's latest announcement on further liberalisation of onshore markets had helped to ease off some of the foreign selling pressure.
“By end-August, the MGS benchmark yield curve bull steepened as gains were led by longer tenures.
“Both the 15y and 20y MGS yields tightened significantly by 32 bps and 42 bps to 3.48% and 3.55% compared with the previous month.
“Meanwhile, the benchmark yield on the 10y MGS shed 25 bps to 3.32%. The MGS market had raked up gains for three consecutive months since June.
“As the time of writing, expectations of an OPR cut in September continued to grow. The 3m KLIBOR had fallen by six bps to 3.40% from 3.46% at end-July.
“As the spread between the 3m KLIBOR and OPR has widened, we opine that MGS yields would continue to be pressured downwards, pricing-in expectations of a potential OPR cut in September, ” MARC said.