KUALALUMPUR: Malaysia Government Securities (MGS) began the year with heightened volatility as the benchmark yield of 10-year bonds bottomed at 2.63 per cent after peaking at 2.70 per cent in early January.
The MGS had initially swung upwards during the first week of trading, Malaysian Rating Corp Bhd (MARC) said.
The upward momentum was then tempered by increased uneasiness surrounding domestic political developments.
"Surging Covid-19 cases that breached the 2,000 level (daily) also stoked fears of another round of the Movement Control Order (MCO). All these factors erased some of the previous month's gains.
"MGS yields were also pressured by Covid-19 vaccine delays in comparison with Indonesia and Singapore," it said.
The rating agency said with the announcement of MCO 2.0 and the emergency declaration, investors had switched their focus towards Bank Negara Malaysia's Monetary Policy Committee meeting last month.
Investors raised their bets on another overnight policy rate (OPR) cut as recovery turned bleaker and the upward pressure on MGS yields began to ease in mid-January as investors priced in a 25 basis point (bps) cut, it said.
MARC said yields quickly rebounded higher after Bank Negara left the OPR unchanged at 1.75 per cent.
In the final week of January, MGS yields remained elevated amid the extension of MCO 2.0 and the US reflation trade.
"The US reflation trade was powered by a rally in global crude oil markets and bets on further fiscal stimulus as the Democratic Party secured control of the United States Congress.
"By end-January, the MGS yield curve steepened as yields along the 2y5y (two-year/five-year) curve fell by 3bps to 6bps while longer-term yields rose by 1bp to 14bps.
"Demand for short-term MGS continued to persist as some investors believed that another OPR cut is still viable," it said.
MARC said demand for long-term MGS was dampened by sluggish domestic demand as both the three-year (3y) and 10-year (10y) MGS were last quoted at 1.84 per cent from 1.88 per cent in December and 2.71 per cent from 2.65 per cent in December.
"The 10y/3y MGS yield widened to 86bps (from 77bps in December). MGS trading volume rose by 66.9 per cent to RM45.4 billion (from RM27.2 billion in December)," it said.
Despite the poor yield performance seen in MGS due to sluggish domestic demand, MARC said the local bond market managed to rake in a total net foreign inflow of RM3.7 billion.
This brings the total foreign holdings to RM226.7 billion which is equivalent to 13.9 per cent of total outstanding local bonds.
MGS received most of the foreign inflows in January with foreign investors buying into January's dip as Malaysia remains in a deflationary environment with the December Consumer Price Index recording a decline of 1.4 per cent year on year (yoy).
Foreign sentiment also remained positive as Malaysia's sovereign rating was affirmed at A3/Stable by an international rating agency.
Foreign holdings of MGS surged by RM2.3 billion (from RM2.4 billion in December) to RM179.6 billion, which is equivalent to 40.5 per cent of total outstanding MGS, it said.
"The bulk of the foreign demand for MGS was mostly concentrated along the belly until the long end of the curve given positive yield differentials, in comparison with USTs along the 1y3y curve which declined by 6bps to 15bps.
"Positive yield differentials at the short end only declined by 1bp to 6bps," it added.