Foreign flows momentum reversed in February after the OPR increase in January. Foreign holdings of MYR debt securities declined by RM3.9bn to RM207.2bn in February 2018, equivalent to 15.7%.
Foreign holdings of MGS in February decreased by RM3.1bn to RM165.5bn from RM168.6bn. Foreign ownership of GII also dipped lower as foreigners sold RM0.5bn to RM18.4bn from RM18.9bn. In percentage wise, foreign ownership of MGS dropped to 45.4% (Jan’18: 45.7%; Dec: 45.1%; Nov: 44.3%; Oct: 42.7%) while holdings of GII was also lower at 6.7% (Jan’18: 6.9%; Dec: 6.9%; Nov: 6.7%; Oct: 7.4%). Given the outflow of RM3.6bn to RM183.9bn in foreign ownership of government debt (MGS + GII), total foreign holding in government debt declined to 28.7% from 29.2% in January.
Meanwhile, foreign holdings of discount instruments decreased by RM1.0bn to RM7.0bn while foreign holdings of PDS increased by RM0.7bn to RM16.3bn. In combined amounts (inclusive of short term bills/notes and corporate bonds/sukuk), foreign holding levels in February 2018 were lower by RM3.9bn, bringing total foreign ownership of MYR bonds to RM207.2bn or 15.7%.
As at end-February, there were RM3.9bn outflows (Jan’18: +4.4bn; Dec: +RM2.7bn) from total debt securities while foreigners sold RM1.1bn of equities (Jan’18: +3.4bn; Dec: +RM1.0bn), this means a total portfolio outflow of RM5.0bn for equities and debt securities combined (Jan’18: +7.8bn; Dec: +RM3.7bn). The foreign inflows declined in February amid the weaker global bond sentiment and an exodus of foreign funds from stocks listed on Bursa due to steep selloff in the global stock market in early February.
The US government passed a budget deal to increase spending by USD300bn over two years, which ended a short-lived shutdown but raised worries of increasing government debt and spending, which eventually lifted bond yields. Upwards pressure on yields was sustained after FOMC minutes members’ view the labor market has continued to strengthen while the economy was expanding at a solid rate. More importantly, several policymakers expect inflation to gradually rise and move towards the 2% target over medium term.
The jolt in US equities led to a spike in volatility in global asset prices including that of global bonds and currencies. The MYR and MGS, were also influenced by somewhat higher volatility resonated across global markets. Malaysian bonds’ positive momentum eased last month, along with USD/MYR downtrend which halted at 3.88 levels. However, by the end of the month, bonds and the local currency garnered back support.
We believe external factors will continue to be key drivers of the local bond market. These include monetary policies of major global and regional economies and US fiscal policies. We also remain vigilant on geopolitical developments. The recent 25bps hike in OPR is viewed as normalization of rate and the probability of further rate hikes in 2018 is very much data-dependent. Until a clearer picture emerges, yields should stay range bound, driven by external market uncertainties. Foreign investors may also tread more cautiously as the general election approaches, resulting in some market uncertainties. In the medium term we expect a flatter yield curve. Short term yields should rise following the recent hike but long term yields may not rise significantly given the still benign inflation outlook.
On domestic front, the BNM MPC meeting on 7 March was a non-event as BNM has maintained the Overnight Policy Rate (OPR) at 3.25%, but the risk of supply concentration between March and May, i.e. a total of 11 auction and the expected gross MGS+GII supply of RM37.5bn, could weigh on the curve unless the individual auction size is intentionally reduced. On external front, the hawkish bias speech by Fed Chair Powell has increased the odds of Fed dots being revised higher from 3 to 4 hikes at the 20-21 March meeting unless the upcoming inflation and jobs data disappoint.
Source: BIMB Securities Research - 8 Mar 2018