On: March 30, 2022 In: Blog, Fixed Income, Knowledge Centre

By Opus Asset Management Sdn Bhd

  1. Seeing as the conflict has dragged on for a month as of writing, what has the initial impact been on the Malaysian Government Securities (MGS) market and what will it be going forward?

To summarize, the MGS market had already priced in multiple risks in the market, and the recent reaction to the Russia-Ukraine war only partly reflects the repricing of Malaysia’s yield curve. On average, the yield curve already rose more than 1% over the last 12 months, while MGS yields rose by about 20bps since the beginning of the invasion on 20th February. The upwards shift of the yield curve cannot be solely attributed to the Russia-Ukraine war, as investors remained aware of other factors such as the Federal Reserve’s (Fed) tightening cycle – the Fed raised rates by 25bps on 17th March, and maintained an aggressive narrative on further rate increases. Therefore, investors will refocus on rising interest rates and inflation since the narrative on the war remains volatile, characterised by Russia’s advances into Ukraine with intermittent anticipations of when a ceasefire may happen.

Going forward, the impact from the Russia-Ukraine war on MGS is expected to remain muted as Malaysia benefits from safe-haven inflows due to its investment grade status. Supporting this, a reduction in the weight of Russia’s bonds in global indices would lead to a reallocation of funds to other emerging markets, especially the commodity exporters such as Malaysia that are benefitting from the rise in commodity prices. Malaysia’s Gross Domestic Product (GDP), trade balance and fiscal balance are expected to benefit from the rise in commodity prices.

  1. To follow up on the previous question, how has the US Treasury (UST) market reacted to the Russia-Ukraine war?

The reaction in the UST market was volatile as Treasuries were caught in the middle of a tug-of-war between safe haven inflows and outflows from investor concerns over elevated US inflation and the aggressive path of expected interest rate hikes. On one hand, the 10 year (10y) UST yields rose above the 2% key level as investors priced in the Fed rate hike path in response to persistent US inflation. On the other hand, the news of the Russian invasion initially caused yields to decline, although inflation worries gradually took priority for investors. The release of February inflation numbers (+7.9% YoY) resulted in the UST yield rising significantly, with the UST10Y poised to approach 2.5% at the time of writing. Moving forward, we expect the Russia-Ukraine war impact on UST to manifest itself via elevated inflation from higher commodity prices.

  1. With so much mention about higher energy prices and the impact on inflation, what is the impact of the Russia-Ukraine war on commodities and are there any stagflation implications for Malaysia?

Unsurprisingly, energy commodities such as natural gas, crude oil and coal saw prices spike due to the position of Russia as the world’s third largest petroleum producer. Already rising in line with the global economic recovery in 4Q21, Brent crude oil price made further gains on the back of the Russian invasion. Prices comfortably exceeded the USD100 per barrel mark, peaking near USD130 before settling at USD117 as of writing. The increase in energy prices would spillover to other sectors, for example, in agriculture as natural gas is an important component in fertilizer. Global trade sanctions on Russia has also led to a reduction in the global supply of key commodities such as wheat and nickel, also leading to a rise in prices of other agricultural commodities and industrial metals. This environment of elevated commodity prices is expected to persist for the rest of 2022 as peace talks between Russia-Ukraine show little signs of progress.

Elevated commodity prices would translate into a rise in inflation, and in extreme cases stagflation whereby inflation continues rising despite a decline in GDP growth. We view the chances of stagflation occurring in Malaysia as negligible, although rising core inflation is unavoidable as the economy recovers. So far, economic indicators such as the Purchasing Managers’ Index (PMI) remain in expansion since Oct’2021. Combined with a manageable inflation environment (Feb’22 CPI: +2.2% YoY), the slack in Malaysia’s economy suggests a persistent economic recovery, supported by Malaysia’s high vaccination rates and gradual transition to a post-COVID economy. Furthermore, Malaysian consumers are insulated from commodity price rises as Malaysia has subsidies on various price-controlled goods such as RON95 petrol and basic foodstuffs. In the same vein, Malaysia is able to keep the subsidies in place due to its “natural hedge”, for example, higher petroleum revenue can be used to offset higher petrol subsidy costs.


The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity. Individual investors should contact their own licensed financial professional advisor to determine the most appropriate investment options. This material contains the opinions of the manager, based on assumptions or market conditions and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information provided herein may include data or opinion that has been obtained from, or is based on, sources believed to be reliable, but is not guaranteed as to the accuracy or completeness of the information. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Opus Asset Management Sdn Bhd and its employees accept no liability whatsoever with respect to the use of this material or its contents.