The Fed raised the FFR by 50bps in May, the biggest increase in 22 years, to tame the 40-year high inflation rate. The short-end till belly of the UST yields closed lower in May in the range of 4bps to 17bps. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) rate, edged lower at 6.3% in April (Mar: 6.6%). Euro Area’s inflation rate peaked at a new high at 8.1% in May (Apr: 7.4%), driven by soaring food and energy prices.
Consequently, core and peripheral government bond yields rose in May by between 8bps and 36bps. Yield surges were more pronounced on peripherals, especially Italian government bonds. In May, BoE increased the interest rate by 25bps to the highest level in 13 years to 1% to combat inflation fueled by high energy prices amid the Russia-Ukraine military conflict. Markets continue to price in another three rate hikes over this year.
The yield premium between 10y CGB and 10y UST bonds has vanished in the past few months amid a hawkish move by the Fed to combat the surging inflation. In May, the yield premium shrank further by 11 bps, more than double compared with the 5bps in April.
Malaysian Government Bond Market
Total MGS/GII outstanding expanded by 11.1% y-o-y to RM947.3 billion in May 2022 as there was no redemption of government bonds recorded. This is notwithstanding the reduced issuances in both MGS (May: RM4.5 billion; April: RM10.0 billion) and GII (May: RM8.0 billion; April: RM9.5 billion) segments during the month.
From January to May 2022, MGS/GII issuances were higher at RM72.5 billion versus RM67.0 billion recorded during the corresponding period last year. The government raised a total of RM12.0 billion through three public offerings, while the remaining RM0.5 billion was raised through private placement.
Strong demand from yield-seeking investors was seen in all three offerings, which ended with BTC ratios exceeding 2.5x. Of note, the 3y reopening of GII drew the highest BTC ratio YTD at 3.6x.
Malaysian Corporate Bond Market
May saw muted fund-raising activity in the local corporate bond market, where the gross issuance dropped to RM4.1 billion versus RM14.0 billion in the previous month. All segments recorded declines in issuances. Issuances in the unrated and rated corporate bonds (Cagamas included) fell to RM0.4 billion (April: RM1.3 billion) and RM3.7 billion (April: RM10.3 billion), respectively. In addition, there were no issuances from the quasi-government segment. Issuances remained dominated by the financial services sector, which raised RM3.0 billion during the month.
MARC Rating Activities
MARC Ratings assigned a preliminary rating of AAAIS to Amanat Lebuhraya Rakyat Berhad’s (ALR) proposed Sukuk programme of up to RM5.5 billion. MARC Ratings has assigned a final rating of AAAIS to TNB Power Generation Sdn Bhd’s (TPGSB) Sukuk programme of up to RM10.0 billion. MARC Ratings also affirmed seven ratings from six different issuers with their outlook maintained stable. There were no rating migrations in May. MARC Ratings withdrew its rating of AAAIS on Cagamas MBS Berhad’s Tranche 6 under the RM2,110.0 million asset-backed Sukuk Musyarakah issuance (CMBS 2007-1-i).
Foreign Holdings of Local Bonds
The foreign flows of the local bond market returned to positive territory in May amid flight-to-safety by foreign investors and a hawkish pivot by BNM. Nevertheless, the magnitude of foreign flows was only a meagre RM531 million, which did not completely offset the relative net foreign outflows of RM2.2 billion in April. Total foreign holdings share of local and corporate bond markets remained constant at 14.4% and 1.7% in May. Following the net foreign inflow, total cumulative foreign holdings in the local bond market grew to RM911.1 million for the first five months of 2022.
