Published on 22 Apr 2022.
The Malaysian bond market last month registered its first foreign net outflow since November 2021. Led by MGS and GII (RM4.1 bil), the overall net outflow of RM4.0 bil in March more than offset the net inflow of RM3.1 bil in February. The cumulative foreign fund flow year-to-date, however, remained positive at RM2.6 bil.
The sharp outflow came amid a broad selloff in global bond markets last month, triggered by more aggressive monetary policy tightening signalled by the US Federal Reserve (Fed). The Fed now foresees six more 25 bps hikes through the rest of the year, a sharp acceleration from its previous expectation of just two additional rate hikes. The Fed Chairman also indicated that balance sheet reduction could commence in May, which could be the equivalent of another rate hike for 2022.
As a result, bond yields trended sharply upwards, with 10-year UST and MGS yields respectively jumping 49.0 bps and 19.6 bps m-o-m to 2.32% and 3.84% as of end-March. The pressure persisted in April, with these yields climbing further to 2.83% and 4.02%, respectively, as of 14 April. Consequently, this reduced the UST-MGS yield spreads to an average of 135 bps in the first half of April, down from 159 bps and 171 bps in March and February, respectively. With BNM keeping pat on the OPR, narrowing yield differentials may dampen foreign appetite for MGS in the near term.
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