Hawkish expectations were rife in October as global central banks are set to normalise their monetary policies soon. The US Federal Reserve had announced that it will begin tapering its asset purchases by USD15.0 billion from its USD120.0 billion monthly bond-buying programme. In the EU, the European Central Bank had hinted that the Pandemic Emergency Purchase Programme would end in March 2022. Meanwhile, the Bank of England (BoE) predicted that inflation would rise to around 5.0% y-o-y in 2Q2022.
The global central banks’ increasing hawkish views have led to higher yields across global bond markets. This was further exacerbated by a heightened inflation outlook following the rise in crude oil prices, leading to investors pricing in more aggressive rate hikes by global central banks. The US inflation rate in October spiked to 6.2% y-o-y while the EU’s inflation rate reached a 13-year high at 4.1% in the same period. The UK’s inflation rate came in at 4.2% in October, above the BoE’s 2.0% target. Meanwhile, Malaysia’s October Consumer Price Index (CPI) rose 2.9% y-o-y (Sep: 2.2%) and is expected to continue rising on the back of the gradual economic reopening. All states in Malaysia have transitioned into Phase 3 or 4 under the National Recovery Plan.
As a result, Malaysian Government Securities’ (MGS) yields rose on the back of the hawkish outlook. Investors also believed that Bank Negara Malaysia (BNM) would raise the Overnight Policy Rate (OPR) by 2022, mirroring the global hawkish view. In November, BNM left the OPR unchanged at 1.75% as widely expected during its final Monetary Policy Committee meeting for 2021.
MGS yields rose despite foreign investors raising their buying momentum in October, making local investors net sellers of MGS for the month. Foreign holdings of MGS surged by RM2.7 billion to RM192.0 billion (Sep: RM189.3 billion), equivalent to 40.1% of total outstanding. Foreign demand in October was supported by yield hunting activities and the stronger ringgit.
In addition to the hawkish outlook, MGS were also pressured by heightened supply concerns ahead of the tabling of Budget 2022. It is worth noting that Malaysia’s development spending is mostly funded by debt.
By end-October, the MGS yield curve was seen to be flattening as yields at the short end till the belly of the curve rose higher compared to the yields at the longer end. MGS yields along the 2y10y curve surged by 15bps to 27bps while MGS yields along the 15y30y rose by 12bps to 17bps. Both the 3y and 10y MGS yields last settled at 2.69% (Sep: 2.47%) and 3.59% (Sep: 3.38%). The 20y/3y MGS yield spread narrowed to 154bps (Sep: 162bps). Meanwhile, trading activities were slightly lower in October with the total volume declining to RM38.9 billion (Sep: RM39.9 billion).
