- Increasing demand for Malaysian government bonds has exerted downward pressure on the long-term yields in recent months.

- Global holdings of government bonds, which include both conventional and Islamic sovereign bonds, rose to 31.6% in April (vs. 30.0% in March).

- Meanwhile, foreign holdings of MGS had advanced to 47.0% of total outstanding MGS in April. This compares to 45.7% in March and 44.1% as at end-2014.

- On a YTD basis, total amount of foreign holdings of MGS surged by a healthy 8.4% to RM157.6bil in April (2014: +6.0%). From a month ago, foreign holdings rose 4.1% MoM (or +RM6.1bil).

- Nonetheless, total outstanding MGS posted a slower growth rate compared to the foreign holdings level. Total outstanding MGS gained 1.7% YTD to RM335.3bil in April (2014: +8.0%).

- At yesterday’s close, the yield for 10-year MGS has trended lower to 3.88% (or -39bps from the recent high of 4.27% seen on 7 January).

- Going forward, the risk of massive capital outflows due to high foreign ownership of MGS is reduced on the back of the prevailing positive real interest rate environment since September 2014.

- Note that real interest rate surged to a recent high of 3.15% in February 2015 as inflation was benign during the start of the year.

- However, prices had picked up in March and will trend higher in the months ahead. Real interest rate came in lower at 2.35% in March.

- That said, Malaysia is likely to maintain an accommodative monetary policy and the key rate will probably be retained for the rest of 2015.

- While monetary policies eased in China, Europe and Japan, Malaysia is unlikely to join that camp of policy easing owing to the current domestic economic climate.

- On the domestic front, Malaysia continues to battle with the following:- (i) elevated household debt level; (ii) weak Ringgit currency; (iii) risk of further downward pressure on the international reserves; and (iv) higher prices ahead.

- Household debt has been on the rise since 2008. The household indebtedness soared to 87.9% of GDP in 2014 from 60.4% in 2008.

- On the other hand, reserves at BNM amounted to USD105.8bil (or -8.7% YTD) in April. The reserves level is able to finance 8.0 months of retained imports and 1.2 times the short-term external debt.

Source: AmeSecurities Research - 15 May 2015