• Foreign holdings of MYR debts securities decreased to RM188.6bn
   
• Foreigners sold RM0.5bn of MGS

• Total portfolio outflow of RM0.99bn for equities and debt securities combined

• Search for higher yielding bonds a positive for Malaysia’s bond market

Foreign investors sold Malaysia’s debt securities in October as total foreign holdings declined by RM0.5bn to RM188.6bn. Foreign holdings of MGS decreased by RM0.5bn to RM153.7bn (Sep: RM154.2bn; Aug: RM153.7bn; Jul: RM154.7; Jun: RM149.1bn). However, percentage wise, foreign holdings of MGS increased to 37.9% as total outstanding for the month had declined due to RM11.8bn worth of MGS matured in October. Foreign holdings of GII increased slightly to RM15.4bn in October (Sep: RM15.3bn; Aug: RM15.3bn; Jul: RM14.7bn; Jun: RM14.7bn). These reduced foreign holdings of Malaysian government bonds (MGS & GII) by RM0.4bn to RM169.1bn, or 23.0% of total bonds outstanding in September.

Foreign holdings of discount instruments decreased by RM0.3bn to RM7.3bn as foreign investors sold Malaysian Treasury Bills. Foreign holdings of PDS increased slightly by RM0.2bn to RM12.2bn. As a result, in combined amounts (inclusive of short-term bills/notes and corporate bonds/sukuk), foreign holding levels in October 2019 were lower by RM0.5bn, bringing total foreign ownership of MYR bonds to RM188.6bn or 12.6%.

As at end-October, international investors sold RM0.5bn of Malaysian bonds (Sep: +RM0.9bn; Aug: -RM0.1bn; Jul: +RM5.7bn) whilst foreign investors continued to sell equities albeit at a slower pace (Oct: -RM485m; Sep: -RM559m; Aug: -RM2.6bn; Jul: -RM79m). This means a total portfolio outflow of RM0.99bn for equities and debt securities combined. Meanwhile, Bank Negara Malaysia’s (BNM) international reserves increased USD0.2bn to USD103.2bn as at end-Oct from USD103.0bn as at end-Sep. It remains sufficient to finance 7.6 months of retained imports and is 1.1 times total short-term external debt

US bonds showed strength following the Fed’s 3rd interest rate cut of 25bps on 30 October as investors and traders digested the strong possibility of a hold on any further easing. Meanwhile Fed Chair Powell stated that the 3rd rate cut of 25bps to 1.50%-1.75% was meant to sustain economic expansion and any future rate hikes instead would depend on inflation. He also reiterated that recent heavy issuances of Treasury Bills were purely “technical” and not be construed as quantitative easing. US Treasuries also rose in strength on safe-haven bids despite a silver lining going forward in the long-standing US-China trade issues. The UST 2Y ended at 1.53% whilst the much-watched 10Y rallied another 8bps at 1.69%. The first reading of US 3Q19 GDP showed annualized qoq growth of 1.9% against prior month’s +2.0%. Overall, October is best characterized as a “full risk-on”, with developed markets bond yields mostly higher across the board while riskier emerging markets Asia yields tightened.

Local govvies saw improved momentum and appetite. End of October saw Malaysia govvies rallied post FOMC meeting with players extending duration. Gains were in particular seen along select long bonds as well as 5yr and 7yr benchmarks which had looked attractive versus the 10yr MGS. The curve generally shifted lower as overall benchmark yields ended mostly lower between 1-6bps save for the 3yr and 5yr MGS bonds. The benchmark 5yr MGS closed at 3.33% whilst the 10yr MGS ended at 3.44%. Moreover, the benchmark 10yr-3yr yield spread slightly flattened as the short-end underperformed.

Three auctions were conducted in October:

I. 10-yr Reopening of MGS 08/29, RM3.0bn

II. 20-yr Reopening of MGII 09/39, (RM2.0bn auction + RM0.5bn private placement)

III. 5-yr Reopening of MGS 06/24, RM3.5bn

Search for higher yielding bonds a positive for Malaysia’s bond market

The dovish tilt to global policy making continued in October with the US Fed cutting rates for the third time, but whether this represents the end of the easing cycle could be dependent on how economic growth fares in the fourth quarter.

Bank Negara Malaysia (BNM) Monetary Policy Committee (MPC) members opted to maintain the Overnight Policy Rate (OPR) at 3.00% on 11 Nov. This is the third straight time the MPC left the rate unchanged after a sole rate cut for the year at May’s MPC meeting. Taking the cue that the Fed would resume its monetary easing mode if the economy signals a sharp slowdown, we reckon there is no rush for BNM to cut rates at this juncture. However, given the prevalent state of uncertainty in both the global and domestic economy, we expect BNM to still lean towards a rate cut to lend support to growth as it clearly stated in monetary policy statement that “Monetary easing and other policy measures are expected to provide some support to growth”. 

Therefore, we do not expect BNM to cut anytime soon and we opine the direction of monetary policy stance will remain data dependent as focus on growth takes precedence and we would have to push back our call on any OPR rate cut to mid-2020. We see the environment of low domestic inflation and pre-existing risks to Malaysia’s economic growth allow the central bank room to lower interest rates if needed. In the meantime, we expect BNM to closely monitor incoming data and reserve ammunition for further stimulus if growth momentum sags further, whether as a result of the trade war, or any other factor. Hence, going into 2020, the monetary easing outlook remains. Much will depend on how domestic activities will be able to support growth in an environment where external headwinds remain.

Meanwhile, the depressed yields landscape of developed market bonds (lower yielding UST, German Bunds, JGB bonds, UK Gilts) will help spur interest for higher yielding EM Asia bonds including Malaysia and hence the search for yield will continue to remain as a key theme as we progress into 2020. The domestic govvies space will continue to appeal to non-resident investors from a yield perspective as we now expect carry trade themes to again anchor demand. We expect foreign inflows to turn positive in the coming months as we expect traction to improve, with 10-year yields potentially tightening further from current levels

Source: BIMB Securities Research - 8 Nov 2019