The Malaysian government has been pursuing an expansive fiscal policy since the beginning of the year. On 10 March it announced an MYR60 billion stimulus package, generating concerns that the supply of longer-maturity debt will balloon as the government raises funds to support the package. On 20 March, the government announced a revision of the existing 2009 auction calendar for Malaysian Government Securities (MGS) and Government Investment Issues (GII) by increasing the number of offerings from 27 to 28. The frequency of debt offerings was also changed as follows: 2-year from zero to two issues, 3-year from six to nine issues, 5-year from ten to eleven issues, 10-year from nine to six issues, and 20-year from two to zero issues. This announcement has had the effect of steepening the government bond yield curve.

Total local currency (LCY) bonds outstanding for Malaysia in the first half of 2009 stood at MYR610 billion, a decrease of 0.4% y-o-y, with outstanding government bonds falling by 5.5%. Outstanding BNM Bills and state-owned bonds (e.g., Khazanah and Cagamas bonds) fell by 54.3% and 59.0%, respectively. Outstanding central government bonds (e.g., Malaysian Treasury bills, Malaysian Islamic Treasury bills, GII, and MGS) held up as the public sector grew by 17.6% y-o-y.

Monthly data shows that government bond trading volumes rose to MYR58.1 billion in January and MYR67.7 billion in February after trading volumes declined in 4Q2008. The turnover ratio was 0.18 in January and 0.21 in February. In March, the trading volume fell to MYR58.6 billion and the turnover ratio was 0.18 after a total of MYR10 billion of existing MGS benchmark papers was issued following the announcement of the government’s second stimulus package. Government bond turnover varied in April and May amid speculation on whether BNM would slash its policy rate for a fourth straight time following a contraction of the economy in 1Q09. Trading volume for April and May was MYR71.3 billion and MYR60.8 billion, respectively, with a turnover ratio of 0.22 in April and 0.18 in May. Trading in June rose to MYR63 billion, boosted by debt auctions in MGS, with a turnover ratio of 0.19.

Monthly corporate bond turnover rose in January to MYR5.3 billion from MYR3.9 billion in December, driven by rising investor appetite for corporate bonds following a 75 basis point cut in the overnight policy rate. The turnover ratio in January was 0.02. In February, however, bond trading volume fell to MYR2.6 billion and the turnover ratio fell to 0.01 on heightened risk aversion amid a difficult operating environment for corporations. Trading volume recovered in March to MYR3.6 billion, with a turnover ratio of 0.014. Corporate turnover remained robust in subsequent months, reaching MYR4.9 billion and MYR5.9 billion in April and May, respectively, as the turnover ratio rose to 0.019 in April and 0.022 in May. This was followed by lower trading volume in June at MYR4.8 billion, as the turnover ratio fell to 0.018

On 10 March, the Ministry of Finance announced a second stimulus plan worth MYR60 billion, which is several times larger than the MYR7 billion plan announced in November 2008, following the government’s forecast of a contraction in the economy. The second stimulus plan would run over the next 2 years and swell the 2009 budget deficit to 7.6% of GDP. Finance Minister Najib Razak said that the additional spending would be funded from domestic sources