Market Summary

Yield Movements

Movement in Malaysia's local currency (LCY) government bond yield curve was mixed between 31 August and 30 October. Yields at the tail of the curve (from 1 month to 6 years) decreased an average of 10 basis points (bps) while yields of longer-term tenors (from 7 years to 30 years) increased an average of 2 bps. The downward movement of the curve was driven by the effects of Bank Negara Malaysia's (BNM) overnight policy rate cuts and by demand from foreign investors after Malaysia's debt securities were given a higher weight in JP Morgan's Government Bond Index-Emerging Market Index. On the other hand, the jump in yields reflect investors' flight to safety as the trajectory of the coronavirus disease (COVID-19) pandemic continues to be uncertain. The yield spread between 2-year and 10-year government bonds expanded from 84 bps to 96 bps during the review period.

Size and Composition

The LCY bond market of Malaysia expanded 1.9% quarter-on-quarter (q-o-q) in the third quarter of 2020, reaching a size of MYR1,583.7 billion (USD381.0 billion), supported by expansions in LCY government and corporate bonds. The LCY government bond market grew 2.3% q-o-q as outstanding central government bonds increased. Meanwhile, LCY corporate bonds outstanding jumped 1.3% q-o-q. Total outstanding Islamic bonds at the end of the review period grew 1.7% q-o-q.

Policy, Institutional and Regulatory Developments

On 24 September, FTSE Russell kept Malaysia in its FTSE Russell Fixed Income Watch List for possible exclusion in its FTSE World Government Bond Index. In its review, however, FTSE Russell lauded BNM's regulatory reforms in enhancing market liquidity and foreign investors' access to its financial market. The index provider will continue to monitor if the effects of BNM's policies translate to more operational efficiency and better access to international financial market participants.