Yields in government bonds across the US and the UK continued to surge in March amid continued progress in vaccine rollouts and massive stimulus plans. Both the Fed and the BoE left their key policy rates and pace of bond purchases unchanged. Yields on both the 10y UST and 10y UK gilt were up by 63bps and 4bps to 1.74% and 0.93% (Feb: 1.11% and 0.89%). In contrast, euro zone government bond yields drifted lower in March amid renewed COVID-19 pandemic fears brought upon by rising cases of new variants and the AstraZeneca vaccine suspension. ECB’s move to increase the pace of its bond purchases and rising tensions between China and Western countries also pushed yields downwards. The 10y German bund was down by 2bps to -0.27% (Feb: -0.25%). In China, CGB yields were pressured downwards by safe-haven demand from domestic investors as Chinese stock prices plunged. The 10y CGB yield shed 9bps to 3.19% (Feb: 3.28%). Meanwhile, foreign investors were net sellers of CGBs for the first time in March since February 2019. Foreign demand was dampened by the narrowing yield spreads over USTs and the weaker yuan. 

Gross issuance of MGS/GII strengthened to RM16.5 billion in March (Feb: RM12.0 billion), with new supply of MGS worth RM8.5 billion and GII worth RM8.0 billion. Overall demand for the four papers tendered was slightly weaker with the average BTC ratio down to 2.1x (Feb: 2.2x). Yields of MGS continued to be traded higher in secondary markets with yields at the short end rising more sharply. Short-end MGS yields were pressured by BNM’s less dovish stance. Meanwhile, MGS yields at the longer end were pressured by the US bond market rout and the announcement of the PEMERKASA stimulus programme. However, MGS yields retraced lower in the final week following FTSE Russell’s decision to remove Malaysia from its negative watchlist for potential exclusion from the WGBI. By end-March, both the 3y and 10y MGS yields rose by 19bps and 18bps m-o-m to 2.13% and 3.27% (Feb: 1.94% and 3.09%).

Gross issuance of long-term corporate bonds rose sharply in March despite the spike in yields across the rating bands. Gross issuance came up to RM23.8 billion (Feb: RM5.4 billion), the highest monthly level since 2019. March’s robust issuance was supported by significantly higher volumes from unrated and rated corporate bond issuers as well as quasi-government issuers. In tandem with MGS, generic AAA, AA and A yields spiked in March. Investors expect inflation to pick up at a quicker pace this year, diminishing the returns on bonds, especially for AAA and AA-rated corporate bonds amid their relatively small credit spreads above MGS.

In March, final ratings of two issues were added to MARC’s rating universe and 11 issue ratings were affirmed with their outlook remaining unchanged at stable. One issue rating was upgraded and two issue ratings were downgraded. MARC upgraded Quantum Solar Park (Semenanjung) Sdn Bhd’s (QSP Semenanjung) RM1.0 billion Green SRI Sukuk rating to AA-IS/Stable from A+IS/Positive. Meanwhile, ratings on both MEX II Sdn Bhd’s (MEX II) RM1.3 billion Sukuk Murabahah Programme and RM150.0 million Junior Bonds were downgraded further to CIS andC from BBIS and B. MARC also withdrew two issue ratings in March. 

In March, the local bond market continued to attract net foreign inflows, albeit at a slower pace m-o-m. This was despite rising fears of a massive outflow from EMs on rising UST yields and a stronger US dollar. Foreign buying was mainly supported by FTSE Russell’s decision to remove Malaysia from its watchlist for potential exclusion from the WGBI. Total net foreign inflows into the local bond market amounted to RM5.9 billion (Feb: RM7.2 billion), bringing total foreign holdings to RM239.7 billion. This is equivalent to 14.5% of total outstanding local bonds, the highest share of total outstanding since April 2018 at 15.1%.