Responsiveness of the Malaysian government securities yield to the monetary policy tightening in Malaysia

The objective of this study is to examine the responsiveness of the Malaysian Government Securities (MGS) yield to the monetary policy tightening in Malaysia. A total of 397 numbers of each dataset are observed, by using data period from the year 2004 to the year 2016. The sample of MGS yield used in this analysis is short-terms MGS yield, medium-terms MGS yield and long-terms MGS yield. This study is to investigate the reaction of MGS yield that changes to 5-, 15- and 25-days prior, posttrading days and during the trading day to OPR hike, with total days covered are 51 days. The findings also shows all of OPR hike in the various period become stationary at order one I(1), while on MGS yield, all except for the short-term MGS yield during OPR hike on 24 February 2006, medium-term MGS yield during OPR hike on 12 May 2010, short- and medium-term MGS yield during OPR hike on 5 May 2011 and medium-term MGS yield during OPR hike on 10 July 2014 which become stationary at level I(0). Moreover, the results indicate that the yields on government bond are sensitive only to the monetary policy tightening during 2005 which is consistent with the term structure of interest rate theory where the yields to maturity increase as the term to maturing increase. Furthermore, the findings also show that in term of shortrun relationship results, at least eight out of twenty-four of variables in OPR hike does Granger cause to MGS yield at the 1 percent level of significance, given the p-value are less than 1 percent, 5 percent and 10 percent level respectively, while there a total of eight of MGS yield that Granger cause to OPR hike, assuming that OPR hike is a dependent variable. Nevertheless, the findings also concluded that tenth out or fortyeight of variables either both of variable between OPR hikes or MGS does not show Granger cause to each other. However, in term of long-run relationship tested results indicates no long-run relationship appears between the responsiveness of MGS yield to OPR hike, given both Max-Eigenvalue and trace -statistic test appear to have less than 5 percent and 1 percent levels of critical value. For future study, it is recommended a new research to analyse the relationship between interest rate to both MGS and Government Islamic Issuance (GII) for better understanding of Malaysia Capital Market behaviour.