Foreign investors turned net sellers of Malaysian bonds in May, withdrawing RM4.3 billion from the local debt market after recording RM3.8 billion of net inflows in April, as escalating geopolitical tensions in the Middle East and rising US Treasury yields dampened appetite for emerging market assets.
According to a report by Kenanga Research, total foreign holdings of Malaysian debt securities declined to RM304.9 billion in May from RM309.2 billion a month earlier. Foreign ownership of total outstanding debt also eased to 13.1% from 13.4%.
The outflows were primarily driven by a sharp reversal in government securities, which saw RM6.9 billion in foreign selling compared with a marginal RM100 million inflow in April. The weakness was partially offset by continued foreign interest in corporate bonds and sukuk, which attracted RM2.5 billion in net inflows, albeit slower than April’s RM3.6 billion.
A significant portion of the foreign selling occurred on May 20 and 21, coinciding with heightened tensions between the United States and Iran and a broader sell-off across global bond markets.
Kenanga said stronger-than-expected US economic data and persistent inflation concerns had pushed Treasury yields higher, reinforcing expectations that the US Federal Reserve may keep interest rates elevated for longer. This reduced the attractiveness of emerging market fixed-income assets, including Malaysian bonds.
Although Malaysia remains a net energy exporter, investors also adopted a more cautious stance amid concerns over Asia’s reliance on Middle Eastern energy supplies and potential disruptions around the Strait of Hormuz.
Government securities bore the brunt of the selling pressure. Foreign investors sold RM2.0 billion worth of Malaysian Government Securities (MGS) in May, reversing April’s RM700 million inflow. Foreign ownership of MGS slipped to 33.6% from 34.1%.
Government Investment Issues (GII) experienced even larger outflows of RM5.0 billion, compared with RM700 million of outflows in April, resulting in foreign ownership declining to 6.6% from 7.5%.
Meanwhile, foreign demand for corporate bonds and sukuk remained positive, with ownership edging up to 2.9%, reflecting continued investor interest in corporate debt instruments.
The weakness was also reflected in the equity market, where foreign investors turned net sellers of Malaysian stocks, recording RM3.6 billion in net outflows during May compared with RM500 million of inflows in April.
Kenanga noted that RM1.6 billion of the equity outflows occurred on May 29 due to MSCI index rebalancing activities. Beyond these technical factors, investor sentiment remained cautious amid elevated oil prices, rising global bond yields and expectations of a prolonged higher-rate environment in the United States.
Overall, Malaysia’s capital market registered net outflows of RM7.8 billion in May, significantly higher than RM4.3 billion recorded in April.
Despite near-term headwinds, Kenanga maintained a constructive outlook on Malaysia’s debt market, citing the country’s resilient economic growth, manageable inflation, stable sovereign credit ratings and deep domestic institutional liquidity.
The research house said geopolitical developments in the Middle East remain the key risk to regional capital flows in the near term, as concerns over energy supply disruptions and inflation continue to influence global interest rate expectations.
However, it expects Malaysia to remain relatively well-positioned among ASEAN emerging markets and views the country as a regional safe haven. Foreign investor interest is likely to recover once geopolitical tensions ease and volatility in global interest rates moderates, it added.
