KUALA LUMPUR (Dec 2): Yields of Malaysian Government Securities (MGS) rose in October 2021 from a month earlier on the back of a hawkish or rising global interest rates outlook despite foreign investors increasing their buying of MGS, according to Malaysian Rating Corp Bhd (MARC) on Thursday (Dec 2).

In a statement, MARC analysts said the three-year MGS yield at the end of October settled higher at 2.69% from 2.47% in September, while the 10-year MGS yield rose to 3.59% from 3.38%.

"Hawkish expectations were rife in October as global central banks were set to normalise their monetary policies soon.

"Global central banks’ increasing hawkish views led to higher yields across global bond markets.

"This was further exacerbated by a heightened inflation outlook following a rise in crude oil prices, leading to investors pricing in more aggressive rate hikes by global central banks.

"Meanwhile, Malaysia’s October Consumer Price Index rose 2.9% year-on-year (September: 2.2%) and is expected to continue rising on the back of gradual economic reopening. All states in Malaysia have transitioned into Phase 3 or 4 of the National Recovery Plan.

"As a result, MGS yields rose on the back of the hawkish outlook. Investors also believe that BNM (Bank Negara Malaysia) will raise the overnight policy rate (OPR) by 2022, mirroring the global hawkish view,” MARC said.

According to MARC, MGS yields rose in October despite foreign investors raising their buying momentum that month, meaning that local investors were net sellers.

It added that foreign holdings of MGS surged to about RM192 billion in October from RM189.3 billion in September to constitute around 40.1% of total outstanding MGS.

"Foreign demand [for MGS] in October was supported by yield-hunting activities and a 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,” MARC said.

The latest updates on BNM’s website showed that on Wednesday, the yield of three-year MGS, which pay an annual coupon or interest rate of 3.478%, closed unchanged at 2.67%.

Meanwhile, the yield of 10-year MGS, which pay an annual interest rate of 2.632%, closed up one basis point at 3.52%.

The Monetary Policy Committee of BNM during its final 2021 meeting on Nov 3 decided to maintain the OPR at 1.75% after taking into account that risks to Malaysia’s economic growth outlook remain tilted to the downside on external and domestic factors amid lingering Covid 19 pandemic concerns and as the central bank expects the country’s inflation to remain moderate.

BNM said in a statement that risks to Malaysia’s economic growth outlook include weaker-than-expected global economic growth, worsening supply-chain disruptions and the reimposition of containment measures due to the impact of new Covid-19 variants of concern.