In July, UST yields tumbled significantly in a bull-flattening move with yields along the 5y30y curve shedding between 17bps to 21bps to lows last seen in February this year. The rally was spurred by the rapid spread of the COVID-19 Delta variant, amplifying expectations the US economic growth has moved past its peak. The UST bond market rally had also spread to the euro zone with yields on both core and peripheral sovereign bonds experiencing sharp declines. In the UK, gilt yields also fell in July despite the removal of most COVID-19 restrictions. Yield on the 10y gilt fell to its lowest level in five months at 0.65% (Jun: 0.82%). Fears over the spread of the Delta variant across the globe hampering global economic growth have superseded past worries about inflation. In China, yields on CGBs were also significantly lower in July by 12bps to 38bps across the curve, shifting the CGB yield curve downwards. The 10y CGB yield was last quoted at 2.84% (Jun: 3.08%). Investors in China flocked towards CGBs as risk sentiment worsened amid the government’s expanding regulatory crackdown. 

Malaysian Government Bond Market     

In July, gross issuance of MGS/GII strengthened to RM15.0 billion (Jun: RM13.5 billion), with new supply of MGS worth RM5.0 billion and GII worth RM10.0 billion. Three papers were tendered in July amounting to a notional RM11.0 billion with RM2.0 billion raised via private placements. Demand for MGS/GII at auctions improved significantly in July with the monthly BTC ratio at 2.7x (Jun: 2.2x), the highest monthly BTC ratio YTD. As the global pandemic crisis deepened with the rapid spread of the Delta variant, global government bonds have rallied, including MGS. MGS performance in the secondary market in July mimicked the UST market as investors flocked towards safe-haven assets. Domestic COVID-19 cases were also on the rise causing great uncertainty towards Malaysia’s economic recovery prospects. Most of the buying support came from local investors as foreign holdings of MGS fell due to large redemption value. Yield on the 10y MGS fell 11bps to 3.17% (Jun: 3.29%). 

Malaysian Corporate Bond Market     

In July, the decline in gross issuance of long-term corporate bonds was mainly attributed to a significant decline in new supply from rated corporate bond issuers to RM1.9 billion (Jun: RM4.3 billion) and the lack of new issuances from Cagamas (Jun: RM1.9 billion). There was also weaker volume from unrated corporate bond issuers which fell to RM1.1 billion (Jun: RM1.3 billion). Like MGS, generic AAA, AA and A yields also trended lower across the 3y15y curve by 4bps to 21bps. Gains were mostly concentrated along the 3y7y curve while yield decreases along the 10y15y curve were smaller, steepening the yield curves of generic AAA, AA and A benchmarks. However, the trading volume for corporate bonds fell by RM3.6 billion to RM12.3 billion (Jun: RM15.9 billion). 

MARC Rating Activities     

In July, MARC assigned initial ratings of: 1) AIS to Tropicana Corporation Bhd’s RM2.0 billion existing Perpetual Sukuk programme with a stable outlook; and 2) AAA_IS/MARC-1_IS to Small Medium Enterprise Development Bank Malaysia Bhd’s IMTN programme and ICP programme with a combined limit in nominal value of up to RM3.0 billion and a stable ratings outlook. MARC also affirmed a total of 12 issue ratings from eight different issuers with their outlook maintained at stable. Like the previous month, there were no rating migrations and withdrawals in July. Meanwhile, the issue ratings of Serba Dinamik Holdings Bhd, Alpha Circle Sdn Bhd and MEX II Sdn Bhd remain under MARCWatch Negative.

Foreign Holdings of Local Bonds     

Negative net foreign inflows into local bonds widened in July to RM4.9 billion (Jun: -RM1.7 billion), dragging the total foreign holdings down to RM243.8 billion (Jun: RM247.4 billion). Foreign investors held 14.3% of total outstanding local bonds (Jun: 14.6%). The outflows primarily came from MGS amid high redemption value in July at RM13.5 billion. Foreign holdings of MGS reduced by RM3.6 billion to RM188.6 billion (Jun: RM192.1 billion), equivalent to 40.4% of total outstanding MGS (Jun: 40.4%).