Foreign investors recorded a net outflow of RM4.3 bil from Malaysian bonds in May, reversing April’s inflow, amid a pronounced sell-off in government securities. Foreign holdings of Malaysian Government Securities (MGS) and Government Investment Issues declined by RM6.9 bil during the month (April: net inflow of RM48.8 mil). In contrast, corporate bonds continued to see steady foreign demand, registering RM2.5 bil in net inflows and extending the current buying streak to three months, helping to moderate overall outflows.
RAM Ratings Malaysia said investor caution was shaped by rising US-Iran tensions and expectations that US interest rates would remain elevated for longer, amid persistent inflation and a resilient labour market. Against this backdrop, the 10-year US Treasury (UST) yield rose 5 bps month-on-month to 4.45% at end-May, while the 10-year MGS yield remained broadly stable at 3.61%. As a result, the MGS-UST negative yield spread widened to 83.9 bps (end-April: 79.0 bps).
The upward bias in interest rate expectations was further reinforced in June following a more hawkish than expected Federal Reserve (Fed) stance under new Fed Chair Warsh. As widely expected, the Fed left rates unchanged at its June Federal Open Market Committee (FOMC) meeting. However, the statement also signalled a reduced inclination towards policy easing. Following the decision, the 10-year UST yield rose from 4.43% on 16 June to 4.49% on 17 June, before easing slightly to 4.46% on 18 June.
In contrast, the 10-year MGS yield remained broadly stable at 3.63% over the same period. Given the less favourable yield differential and prospects of a higher-for-longer US rate environment, foreign appetite for Malaysian bonds is likely to stay cautious in the near term.
