The Malaysian bond market recorded an overall net foreign fund outflow for the third consecutive month in February, although the pace of the selloff eased from the prior two months. The slower outflow (RM1.2 bil; January: RM5.1 bil) was seen across both MGS and GII (RM1.6 bil; January: RM2.5 bil) and MTB and MITB (RM0.4 bil; January: RM2.5 bil).
RAM says the still weak market demand is consistent with the Federal Reserve’s (Fed) hawkish stance last month against the backdrop of persistent inflationary pressures in the US.
Market expectations that the Fed may keep rates high for longer led to a broad-based increase in bond yields last month. The 10-year UST yield jumped 26.0 bps m-o-m to 4.25% as at end-February, outpacing the 10-year MGS yield which rose 7.6 bps to 3.88% as at the same date. This widened the negative MGS-UST yield differential to 36.8 bps (end-January: 18.4 bps), reducing the appeal of ringgit bonds to foreign buyers. The 10-year UST and MGS yields rose further in March, respectively stood at 4.27% and 3.90% as of 20 March.
However, the ratings agency said the yields are likely to trend downward for the remainder of March as the Fed kept their expectations of three rate cuts for 2024 during the March Federal Open Market Committee (FOMC) meeting, despite the hotter than expected US inflation print. This helped calm investors and led to a jump in rate cut bets, with the market-assigned probability of a rate cut in June surging to around 76% on 21 March from circa 59% the day before, according to CME FedWatch Tool data.
