• Foreign holdings of MYR debts securities declined to RM187.1bn

• Foreigners sold RM5.4bn of MGS and bought RM0.2bn of GII

• Total portfolio outflow of RM5.92bn for equities and debt securities combined

• Demand for government bonds remain resilient

Foreign funds turned net seller of domestic debts with a net loss of RM5.2bn in November, after a brief recovery in October. The outflow of foreign funds was in sync with broad EM trend. This brought the total stock of foreign holdings lower to RM187.1bn in November, equivalent to 13.3%. On a YTD basis, foreign outflows from ringgit bonds expanded to RM14.5bn.

Foreign holdings of MGS in November decreased by RM5.4bn to RM147.6bn (Oct: RM153.0bn; Sep: RM148.3bn; Aug: RM153.9bn; Jul: 154.4bn; Jun: RM150.9bn) whilst foreign investors increase their holdings of GII by RM0.2bn to RM14.9bn (Oct: RM14.7bn; Sep: RM 14.4bn; Aug: RM13.2bn; Jul: 13.8bn; Jun: RM14.3bn). Given the net outflow of RM5.2bn to RM162.5bn in foreign ownership of government debt (MGS + GII), total foreign holding in government debt edged lower to 24.0% from 25.0% in Oct.

Meanwhile, foreign holdings of discount instruments increased by RM0.3bn to RM10.3bn. On the other hand, foreign holdings of PDS decreased by RMo.3bn to RM14.3bn. As a result, in combined amounts (inclusive of short-term bills/notes and corporate bonds/sukuk), foreign holding levels in November 2018 were lower by RM5.28bn, bringing total foreign ownership of MYR bonds to RM187.1bn or 13.3%.

As at end-Nov, foreigners turned net sellers of Malaysian bonds (RM5.2bn) whilst the Malaysian equity market recorded total foreign net outflow of -RM719.1m, almost half of the -RM1.4bn offloaded in October. This means a total portfolio outflow of RM5.92bn for equities and debt securities combined (Oct: +RM6.4bn; Sep: -RM2.8bn; Aug: -RM2.5bn; Jul: +2.3bn). In the corresponding period, Malaysia’s foreign international reserves increased slightly by USD0.3bn to USD102.0bn (Oct: USD101.7bn; Sep: USD103.0bn; Aug: USD104.4bn; July: USD104.5bn).

US Treasuries held well into the month-end as the curve flattened further out; led by the 10-year. Overall benchmark yields were between 2-4bps lower as the 2-year fell 2bps at 2.79% whilst the 10-year rallied, closing 4bps lower at 2.99% levels as investors reacted to US Fed Chairman Jerome Powell’s remark that interest rate is nearing its neutral level; hence the possibility of a lower number of interest rate hikes in the coming year.

End of the month saw government bonds mostly firmer, continued to be supported after Fed’s Powell comments who said interest rates are now ‘just below’ neutral level, which may mean the Fed will halt hikes sooner rather than later. Previously, Powell had signalled that rates were still well below the neutral level. However, the FOMC meeting minutes released showed that policymakers are of the view that another rate hike is warranted ‘fairly soon’. The price of MGS benchmark issues ended the final week of the month mixed with the 3- year and 10-year yields unchanged and declined -0.2bp respectively to close at 3.69% and 4.13%.

Two auctions were conducted in November:

I. 7-yr reopening of GII (Mat on 08/25) RM3.0bn + RM2.5bn (private placement)

II. 5-yr reopening of MGS (Mat on 04/23) RM3.5bn + RM1.0bn (private placement)

Demand for government bonds remain resilient

Market were upbeat on the demand despite higher than expected total issuance for November. The relatively large size corresponded to the trend following the 2019 Budget announcement, where the 2018 fiscal deficit was raised to 3.7% of GDP (from prior target of 2.8% of GDP). We however note that the 5-yr MGS had seen a rise in yields when compared to the pre-release of Budget 2019 (levels seen nearer to 3.75% in mid Oct 2018). Further, the govvies auction in November, which came post-Budget 2019 announcement, saw brisk demand despite the large offering size. This meant to us that the market had mostly priced in the larger expected offerings in the short term period. We also believe that further rise in yields were capped, seeing the US Treasuries had rallied recently amid continued global growth worries (including the US-China tariffs, slowdown in major economies, and Brexit concerns).

The next auction in the pipeline for December is a re-opening auction for the 20-yr GII 08/37 and 3-yr GII 03/22.

Meanwhile Malaysia is seen to outshine other EM’s due to its strong current-account surplus, relatively stable economic growth outlook and valuations with low inflation of 0.6% in October compared with the 10-year government bond yield at around 4.14% levels.

Source: BIMB Securities Research - 10 Dec 2018