The Malaysian bond market registered a net outflow of foreign funds for a second successive month in April. Amounting RM2.2 bil, the overall net outflow last month was slower than the RM4.0 bil selloff seen in March. Consequently, the cumulative foreign fund flow year-to-date fell to RM379.6 mil. Foreign selling was concentrated in MGS and GII (RM2.6 bil). However, foreign investors remained interested in short-term government securities (MTB and MITB) for the third consecutive month, recording RM905.6 mil in net purchases.
The continued bond selloff in April can be largely attributed to investors being on edge in anticipation of a more aggressive monetary policy stance by the US Federal Reserve (Fed) at the May Federal Open Market Committee (FOMC) meeting. In line with market expectations, the Fed delivered a 50 bps interest rate hike on 4 May. The Fed also announced it would start paring down its balance sheet from June onwards to significantly reduce securities holdings accumulated under the aggressive bond purchase programme instituted amid the pandemic.
As a result, bond yields surged broadly across the board. Yields of 10-year UST securities and MGS respectively jumped 57.0 bps and 48.0 bps m-o-m to 2.89% and 4.32% as of end-April. The uptrend generally persisted in the first half of May, with yields of these securities climbing further to 2.93% and 4.43%, respectively, as of 13 May. This trend somewhat reversed last week as 10-year UST and MGS yields respectively fell to 2.78% and 4.35% as of 20 May, as investors seek shelter from US equity market selloff. While the UST-MGS yield spread narrowed again to an average of 135 bps in April (March: 159 bps), a surprise OPR hike on 11 May helped push MGS yields up. This saw the spread widen to around 150 bps immediately following the policy rate increase. The slight improvement in yield differential may support foreign interest in MGS in the near term.
