Foreign investors turned net buyers of Malaysia’s debt securities for the first time in three months (RM5.6b; Jul: – RM3.5b), recording the largest net inflow of the year, and total foreign debt holdings rose to a 3-month high recording RM255.4 billion versus RM249.8 billion in July, with its share to total outstanding debt increasing to 13.9%.
Kenanga says the bond inflows likely returned due to improving global risk sentiment, especially in early August, as US recession expectations eased and the market began to anticipate a less hawkish Fed stance. Furthermore, Malaysia may have benefited from sustained capital outflows from China. The inflow was attributable to a broad-based increase in foreign holdings of government bonds, led by Malaysian Government Securities (MGS), Malaysian Islamic Treasury Bills (MITB), and Government Investment Issues.
Overall, the capital market recorded the largest net inflow in 11 months (RM7.6b; Jul: -RM3.4b) Debt market may record a softer inflow in September amid the return of global risk aversion and aggressive Fed rate hike. The 10-year US Treasury average yield increased by 6bps to 2.92% in August, whilst the 10-year MGS average yield fellby11 bps to 3.96%, narrowing the average yield spread to an almost 4-year low (104 bps; Jul: 122 bps).
Despite the strong inflow recorded in August, Kenanga still expect foreign demand for domestic bonds to be slightly pressured in the near term. This is considering the return of global risk-aversion following the Fed’s renewed hawkish stance at Jackson Hole, with the market now expecting another 75 bps rate hike at the next FOMC meeting, and also due to falling MGS-UST yield differentials. However, domestic bonds may find some support from BNM’s 25 bps rate hike and solid macroeconomic fundamentals.
Moreover, Kenanga still expects bond flows to improve in 4Q22 on fewer government bond maturities and as the pace of Fed hikes eases. The research house expects a year-end USDMYR forecast of 4.35 (2021: 4.17). Given Malaysia’s robust economic recovery, it continues to expect BNM to raise the overnight policy rate by 25 bps at its November 2022 and January 2023 meetings, which would bring it to a neutral rate of 3.00%.