Foreign investors turned net sellers of Malaysian bonds in September, recording RM1.8 billion in outflows after strong inflows of RM15.9 billion in August, according to Kenanga Research.
The research house said the monthly figure masked a sharp reversal towards the end of September, as heavy selling of Malaysian Government Securities (MGS) and Government Investment Issues (GII) wiped out three weeks of steady buying.
Total foreign holdings of Malaysian debt fell to RM318.3 billion from RM320.1 billion in August, while foreign ownership of total outstanding debt eased to 13.4% from 13.5%.
Kenanga said foreign investors had accumulated RM3.5 billion of Malaysian bonds up to Sept 17, including RM2.8 billion of government securities. Buying remained resilient around the US Federal Reserve’s 25-basis-point rate hike.
However, as markets began pricing in further Fed tightening, investors reduced government bond exposure by RM1.6 billion between Sept 18 and Sept 24, while rotating RM2.5 billion into corporate bonds.
Foreign holdings peaked at RM324.3 billion on Sept 24 before selling accelerated sharply at month-end. A total of RM5.9 billion flowed out over the final four trading sessions, including RM4.9 billion from government securities and RM3 billion on Sept 30 alone.
Kenanga attributed the late-month sell-off to increasingly hawkish Fed rhetoric, stalled US-Iran negotiations that pushed oil prices higher, and a broader global bond market sell-off.
Despite the outflows, foreign investors still added RM1.3 billion of Treasury bills during the month, which Kenanga said suggested tactical de-risking rather than a broad loss of confidence in Malaysia.
By instrument, MGS recorded outflows of RM1.8 billion, reversing August’s RM5 billion inflow, while GII saw RM3.2 billion leave the market compared with RM5.6 billion of inflows previously.
Corporate bonds and sukuk continued to attract foreign money, although inflows slowed to RM1.9 billion from RM4.8 billion in August.
Foreign investors also remained net sellers of Malaysian equities in September, with outflows of RM1.7 billion, narrowing from RM2 billion in August. As a result, Malaysia’s overall capital market recorded net foreign outflows of RM3.5 billion, reversing RM13.9 billion of inflows in August.
Kenanga expects foreign bond flows to remain volatile until the Fed reaches the peak of its tightening cycle.
It expects one more 25-basis-point Fed hike in 4Q26 to 4.25%, keeping investors cautious on longer-duration bonds in the near term.
The research house nevertheless expects demand for MGS to recover once the Fed stops hiking and holds rates through 2027, supported by Malaysia’s domestic fundamentals.
Kenanga expects Bank Negara Malaysia to keep the OPR at 2.75% on Nov 5, before raising it once to 3.00% in 1Q27.
It maintained its end-2026 10-year MGS yield forecast at 3.88%, while noting that Budget 2027 on Oct 9 will be important in shaping expectations around fiscal policy, government funding requirements and foreign participation in the bond market.
