Easing of investors’ fear has slowed panic selling of bonds in the wake of the Covid-19 pandemic


By Lee Min Keong

The huge sell-off of Malaysian bonds following the onset of the Covid-19 pandemic has started to abate.

Foreign holdings of Malaysian bonds contracted RM2 bil in April, in contrast to RM12.3 bil the preceding month, according to RAM Ratings.

The rating agency attributed this to the abatement of investors’ panic in the preceding two months, which had been led by asset-management firms.

“The raft of global and domestic liquidity-boosting measures in April appear to have managed to assuage investors’ fears while stabilising market sentiment,” it said in a statement today.

“That said, April still represented the third consecutive month of outflows, as foreign investors’ appetite for emerging market assets remained constrained by heightened global uncertainties amid the Covid-19 pandemic.”

Decline in bond yields

Foreign investors’ less downbeat sentiment has also alleviated the upward pressure on yields. This, along with the pricing in of a potential 50 bps cut in the overnight policy rate (OPR) in early May, had led to a broad-based decline in yields of government and corporate bonds in April, RAM Ratings added.

The lowering of the Statutory Reserve Requirement (SRR) while allowing principal dealers to recognise up to RM1 bil of Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) as part of their SRR compliance may also have supported domestic demand for fixed-income securities, in turn lowering yields.

Bank Negara Malaysia (BNM) had on May 5 announced that banking institutions may use MGS and MGII to meet statutory reserve requirements, effective May 16.

BNM said this flexibility is in place until May 31, 2021. This will release RM16 bil worth of liquidity into the banking system. The SRR ratio remains unchanged at 2%.

“This measure is part of BNM’s continuous efforts to ensure sufficient liquidity to support financial intermediation activity,” said the central bank.

RAM Ratings said the yield of the benchmark 10-year MGS plunged 51.3 bps to 2.9% as at end-April, reversing the 56.9 bps surge of a month earlier.

Looking ahead, bond yields still face downside pressure as recent measures broadening the usage of MGS/GII to meet SRR requirements should support demand for government bonds.

Expectations of further overnight policy rate (OPR) cuts in 2H 2020 should also keep domestic bond yields in check.