Foreign investors turned net sellers of Malaysian bonds in July, recording RM5.6 billion in outflows, up from RM4.9 billion in June, as renewed US-Iran tensions, elevated oil prices and higher US Treasury yields prompted investors to reduce their exposure to longer-duration securities.
Kenanga Research deduced the selling stating that it was broad-based and mainly affected Malaysian government securities, with external factors outweighing supportive domestic fundamentals such as resilient economic growth, moderating inflation, a stable Overnight Policy Rate (OPR) and Malaysia’s affirmed A3 sovereign rating.
Total foreign holdings of Malaysian bonds declined to RM304.2 billion in July from RM309.8 billion in June, while foreign ownership as a share of total outstanding debt fell to 12.9% from 13.2%.
The research house said main reason could be on the renewed tensions in West Asia, higher energy prices and elevated US Treasury yields weighed on investor sentiment during the month.
The US Federal Reserve’s hawkish communication also reinforced expectations of interest rates remaining higher for longer, with markets pricing in a 54% probability of a rate hike in September, according to Kenanga.
The outflows were concentrated in Malaysian Government Securities (MGS) and Government Investment Issues (GII), while Malaysian Treasury Bills (MTB) and corporate bonds and sukuk continued to attract foreign interest.
Foreign outflows from MGS increased sharply to RM7.4 billion in July, compared with RM3.4 billion in June, bringing foreign ownership of MGS down to 33%.
Outflows from GII, meanwhile, moderated to RM0.4 billion, compared with RM0.8 billion previously, while foreign ownership eased to 6.3% from 6.4%.
In contrast, foreign inflows into MTB increased to RM1.4 billion from RM1 billion in June, lifting foreign ownership to 34.7% from 27.7%.
Corporate bonds and sukuk also continued to attract foreign funds, although inflows eased slightly to RM0.8 billion from RM0.9 billion. Continued demand for corporate bonds more than offset outflows from sukuk, with foreign ownership remaining at 3%.
Despite the selling in the bond market, foreign investors returned as modest net buyers of Malaysian equities in July, recording RM300 million in inflows, reversing RM2.4 billion of outflows in June.
Kenanga attributed the improvement to bargain hunting, resilient domestic fundamentals and BNM’s decision to maintain the OPR at 2.75%.
However, renewed tensions in West Asia continued to constrain broader foreign participation in the Malaysian equity market.
Overall, Malaysia’s capital market reverted to net outflows of RM5.3 billion in July, compared with RM2.5 billion in June.
Looking ahead, Kenanga said geopolitical developments and expectations for US Federal Reserve policy would remain key drivers of regional capital flows.
While recent progress in US-Iran negotiations has reduced immediate concerns over disruptions, the research house cautioned that the risk of renewed escalation remains.
Markets have also pushed back expectations for Fed easing following the central bank’s hawkish communication, while renewed geopolitical risks have reinforced the higher-for-longer interest rate narrative.
Nevertheless, Kenanga continues to expect an extended Fed pause, which it believes should gradually improve the external environment for regional bond markets.
The research house said Malaysia remains well positioned to attract foreign capital, supported by resilient economic growth, contained inflation, a stable sovereign rating, a well-anchored monetary policy framework and ample domestic liquidity.
“Despite recent outflows, the house remains constructive on the local debt market, citing supportive macroeconomic fundamentals, attractive real yields and improving prospects for the ringgit as factors that should continue to underpin foreign investor demand.
