• Foreign holdings of MYR debts securities increased to RM210.1bn
• Foreigners bought RM2.8bn of MGS and GII in February
• Total portfolio inflow of RM2.40bn for equities and debt securities combined
• Steady OPR at 3.25% provides further support for bonds

Malaysian debt securities saw net foreign buying activities in March. Foreign holdings of MYR debt securities increased by RM2.8bn to RM210.1bn in March, equivalent to 15.6%.

Foreign holdings of both MGS and GII increased by RM0.4bn in March to RM165.9bn (Jan: RM165.5bn) and RM18.8bn (Jan: RM18.4bn) respectively. In percentage wise, foreign ownership of MGS increased to 45.6% (Feb: 45.4%; Jan: 45.7%; Dec’17: 45.1%; Nov: 44.3%) while holdings of GII remained at 6.7% (Feb: 6.7%; Jan: 6.9%; Dec: 6.9%; Nov: 6.7%). Although there was an inflow of RM0.8bn to RM184.7bn in foreign ownership of government debt (MGS + GII), percentage wise, total foreign holding in government debt decreased slightly to 28.6% from 28.7% in February due to an increased in total outstanding (Mar: RM645.7bn; Feb: RM640.8bn).

Meanwhile, foreign holdings of discount instruments increased by RM2.4bn to RM9.4bn while foreign holdings of PDS declined by RM0.4bn to RM15.9bn. In combined amounts (inclusive of short-term bills/notes and corporate bonds/sukuk), foreign holding levels in March 2018 were higher by RM2.8bn, bringing total foreign ownership of MYR bonds to RM210.1bn or 15.6%.

As at end-March, there were RM2.8bn inflows (Feb: -RM3.9bn; Jan: +RM4.4bn) from total debt securities while the equity market, saw relatively marginal foreign fund outflows of RM0.2bn in March (Feb: -RM1.1bn; Jan: +3.4bn) as a stronger ringgit provided buffer against global volatility. This means a total portfolio inflow of RM2.4bn for equities and debt securities combined (Feb: RM5.0bn; Jan: +7.8bn).

At the March 2018 FOMC meeting, the Fed raised rates by 25bps to 1.50%-1.75% and hiked up forecast for GDP but mainly maintained its inflation target for 2018-2019. Policymakers opined that rise in the labor market and inflation warranted the latest hike but the statement and forecasts lean towards a more controlled or a less hawkish view. As per the projections, 2018 GDP was hiked to median forecast of 2.7% from 2.5% at the December 2017 FOMC. However, FOMC members were unchanged on price outlook, maintaining their median forecast for PCE inflation at 1.9% - same as at December FOMC. The Fed signalled that inflation should move higher in ‘coming months’ but also hinted inflation would stabilize near the 2.0% target in the medium term horizon. The dot-plot projections lean just slightly heavier towards 2.25% for 2018 but mainly go into range 2.75%-3.25% for 2019. This equates to three hikes in 2019 and this is a slightly steeper trajectory for 2019 versus previous forecasts.

The local 10-year MGS bond yield fell marginally in March, averaging at 3.95%. Nonetheless, rising local interest rates has widened the yield gap between the US Treasury 10-year yield and the local 10-year MGS bond yield, elevating the yield gap at a favorable level of 120 basis points as at the week ending 30th March 2018. Hence, we do not expect significant risk from the looming trade war and Fed rate hike to local fund flows.

Steady OPR at 3.25% provides further support for bonds

Trade war, tech-sell off and White House’s personal woes dominated the headlines in March 2018. Though it is not really clear what’s going on but we believe it is not over yet and expect more to come from Trump as he is trying hard to fulfil his promises. Volatility remained high in March on concerns over increased interest rates rest of the year, but MYR bonds rose as US Treasuries rallied amid trade conflict fears between the US and China, and solid ringgit. The swing in stocks was mainly influenced by external factors and less to do with local factors.

Bank Negara Malaysia kept rates steady at 3.25% at the March MPC. The central bank sounded positive on domestic factors but raised caution on possible financial market swings and prospects of trade friction. The central bank toned down a tad its hawkish view from the statement released back in January. On balance, we still expect OPR to remain unchanged at 3.25% for the rest of 2018 unless global conditions improve or domestic price conditions improve. February CPI print came surprisingly low at 1.4%, in contrast to January’s 2.7%, dragged by lower fuel in prices.

While inflation stays soft and Bank Negara will not rush for another hike this year, we see gains in MYR bonds particularly alongside recovery in UST. The appreciation bias of the ringgit appears intact given still weak USD backdrop and the recent downward shift in USDMYR pair. Aside, Fed stance appears to be less hawkish in March FOMC, may pressure USD further which could trigger renewed foreign inflows and provide a lift to MYR bonds in medium term.

Source: BIMB Securities Research - 10 Apr 2018