Yields up on uncertainties, Covid-19 vaccine euphoria

RAM Rating Services senior economist Woon Khai Jhek said although there was steady foreign demand, yields still rose across the board in November.

PETALING JAYA: Despite the seventh consecutive month of net foreign inflow in November, the Malaysian bond yields edged higher on concerns of external headwinds and as the Covid-19 vaccine euphoria takes a grip.

RAM Rating Services senior economist Woon Khai Jhek (pic below) said although there was steady foreign demand, yields still rose across the board in November.

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, he said.

“Domestic yields may have also faced upward pressure amid tighter market liquidity, as the turnover ratio for Malaysian Government Securities (MGS)/Government Investment Issues (GII) averaged at 0.059 in November (10 months 2020 average was 0.116) – the lowest since December 2018, ” he said.

The Malaysian bond market charted its seventh consecutive month of net foreign inflow in November (RM1.9bil), led by MGS and GII (RM2.7bil). Sturdy foreign appetite lifted the year-to-date (YTD) inflow to RM14.8bil as at end-November 2020,25% higher than the corresponding period in the previous year.

Foreign holdings as a percentage of total bonds outstanding rose to 13.6% – the highest level since January 2020. This was underpinned by improving sentiments and yield hunt amid low global interest rates.

Meanwhile, Malaysian Rating Corp Bhd (MARC) said Malaysian bonds tanked in November, sending yields significantly higher compared to October on return of risk sentiment.

Domestic investors cut down on their MGS holdings as the prospect of a quicker economic recovery had heightened, diminishing expectations of future rate cuts, MARC noted.

“Risk-on sentiment was mainly spurred by positive news of Covid-19 vaccine breakthroughs; several vaccines have been proven effective. The improved risk appetite saw investors flocking towards riskier assets like equities.

“Sentiment was also lifted by the signing of the Regional Comprehensive Economic Partnership (RCEP) pact and better-than-expected third quarter gross domestic product (GDP) data.” Malaysia’s GDP contracted by 2.7% year-on-year in the third quarter compared with a bigger contraction of 17.1% in the second quarter.

“Losses in MGS were also spurred by the passing of Budget 2021 at the policy stage and the EPF’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 added.

At end-November, MGS yields along the 3-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, thus steepening the curve.

Both the 3-year MGS and 10-year MGS were last quoted at 1.91% (October: 1.76%) and 2.74% (October: 2.62%), respectively.

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