Money Review: Investors Fled to Safety of Gov't Bonds

The UST market was under selling pressure for the most part of the review week due to concerns on inflation but ended a winner with the emergence of strong buying interest on Friday as investors fled to the safety of government bonds amid fears around Omicron, a new Covid-19 variant.

The benchmark 10-year yield tumbled from its intra-week high of 1.69% on Thursday to close the week at 1.47% (-7.3bps week-on-week).

The 10y-3y yield spread narrowed (yield curve flattened) week-on-week from 69bps to 67bps as the long-end outperformed.

The medium-term inflation expectation (i.e. 5-year breakeven inflation rate: UST-TIPS) fell but remains well beyond the (hotter-than-normal) inflation range of 2.25%-2.50% acceptable (transiently) to the US Fed, as it ended the review week at 2.95% (prior week: 3.04%).

It must be reiterated that inflation expectation remains elevated despite (i) the recent decision to commence asset tapering this month, and (ii) possibility of rate liftoff in the second half of 2022. Whereas, in 2013, the medium-term inflation expectation began to subside (below 2.25% level) upon growing signal of asset tapering.

At the current juncture, it seems the market is still bracing for a longer than transient inflationary pressure. Hence, the possibility of a more hawkish stance by the US Fed going forward.

Meanwhile, the price of domestic MGS benchmark issues ended the review week lower with the 3-year and 10-year yields added 6.3bps and 0.2bp to close at 2.72% and 3.54% respectively. The 10y-3y yield spread narrowed (yield curve flattened) week-on-week from 88bps to 82bps as the short-end underperformed.

Compared to the corresponding month last year, the MGS foreign holding increased by RM20.54b as of end-September 2021. However, the 12-month rolling figure tapered for the fourth consecutive month from its end-May 2021 peak of RM42.14b.

On Bursa Malaysia, the 12-month rolling sum of foreign net equity trade eased marginally as it ended the review week at -RM3.24b (prior week: -RM2.93b).