Published on 19 Aug 2020.
Regional bond markets have seen a recent resurgence of foreign interest as sentiments improve on the resumption of economic activities. Another driving factor is the ample global liquidity from quantitative easing.
Malaysian bonds have been popular, charting their third consecutive net foreign inflow in July (+RM7.1 bil). The consistent inflow had largely offset panic selling during the height of the pandemic, with the YTD-July net inflow currently standing at RM1.3 bil. Consequently, foreign holdings of MGS/GII rose to 23.5% of the total outstanding in July, close to the 23.9% in February – pre-COVID-19. In contrast, the participation rate in Thailand and Indonesia stayed on a downtrend despite also seeing a consistent return of foreign demand.
In line with robust foreign demand, yields trended down through July. This broad-based decline was also driven by BNM’s fourth rate cut this year, for a total of 125 bps year to date. The benchmark interest rate stands at 1.75% – the lowest since the introduction of this policy tool in 2004. Concurrently, the benchmark 10-year MGS yield fell to a record low of 2.62% as at end-July (-32.2 bps m-o-m) while the shorter-term 1-year MGS hit a fresh low of 1.78% (-26.9 bps m-o-m).
Looking ahead, we expect domestic bond yields to stay suppressed amid the abundance of global liquidity and not discounting another round of OPR cuts by BNM. We think OPR could possibly end 2020 at 1.50%.
Woon Khai Jhek, CFA
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