Published on 20 Jun 2022.
Malaysian bonds saw a brief respite in May (+RM0.5 bil) after two successive months of net foreign selling. Foreign investors bought into both long- and short-term government bonds and securities, totalling RM 455.3 mil last month. Consequently, bond yields on the longer end of the curve fell broadly, with the 10-year MGS yield down by 12.8 bps m-o-m as of end-May. The 1-year MGS yield rose 16.5 bps m-o-m in reaction to the 25 bps hike in the overnight policy rate on 11 May.
This rally in May was however short-lived as growing fears of more aggressive US monetary policy tightening in the lead-up to the policy rate decision sparked a deep selloff in 1H June. Investors were spooked in early June by an acceleration in the most recent US inflation print, after signs of moderation in the previous month. The Federal Reserve went ahead with a 75 bps hike in the policy rate on 15 June after signalling a 50 bps increase in its previous guidance, while again lifting its interest rate projections for the next three years. The 10-year UST securities surged to 3.25% as of 17 June (+40 bps from end-May). Likewise, the 10-year MGS yield climbed 14 bps to 4.33% over the same period, completely offsetting the m-o-m decline in May.
We expect foreign interest in the ringgit bond market to remain challenged in the near term, given further US rate hikes. This will narrow the yield spreads between MGS and UST securities, sitting at 108 bps for 10-year bonds as of 17 June.
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