• Foreign holdings of MYR debts securities increased to RM233.8bn in February

• Foreigners bought RM3.5bn of MGS and RM2.1bn of GII

• Total portfolio inflow of RM6.2bn for equities and debt securities combined

• Opportunity arises as MGS/GII yield spike tracking the global bond yields movement

Malaysia continued to record higher foreign portfolio inflows for the second month of 2021 totalling RM6.2bn. It was mainly led by net foreign buying of Malaysia’s debt securities while foreigners remained net sellers of domestic equities. This marks the tenth month of net foreign inflows entering domestic bonds. Foreign inflows primarily entered Malaysian government securities that lifted foreign holdings of MGS and GII.

Looking into details, foreigners bought mainly Malaysian Government Securities (MGS) totalling RM3.5bn (Jan: +2.3bn), and Government Investment Issues (GII) of RM2.1bn (Jan: +RM0.9bn). For MGS alone, foreign holdings rose to RM183.1bn or 41.2% of total MGS outstanding (Jan: 40.6%). Foreign holdings of GII increased to RM27.8bn or 7.2% of total GII outstanding (Jan: 6.8%). Correspondingly, foreign holdings of government bonds (MGS & GII) rose by RM5.6bn to RM210.9bn or 25.4% of total outstanding (Jan: 24.9%). Foreigners also bought Malaysian Treasury Bills (Feb: +RM0.4bn; Jan: +RM0.4bn), Malaysian Islamic Treasury Bills (Feb: +RM0.8bn; Jan: -RM0.6bn) and Private Debt Securities including private sukuk (Feb: +RM0.3bn; Jan: +RM0.2bn).

As at end-February 2021, foreign investors bought RM7.1bn of Malaysian bonds (Jan: +RM3.8bn). Meanwhile, foreigners remained net sellers of domestic equities for 19th consecutive month where equities saw net outflow of RM0.9bn (Jan: - RM0.8bn). YTD, cumulatively, retailers are the only net buyers of our equity market to the tune of RM3.7bn. Local institutions are net sellers to the tune of -RM2.0bn while foreign investors sold RM1.7bn worth of Malaysian equities. As a result, there was net inflows of RM6.2bn for equities and debt securities combined (Jan: +2.8bn) in February.

US Treasuries (UST) fluctuated but ended stronger as month end extensions and portfolio rebalancing took precedence; favouring bonds over equities. The rise in the Fed-preferred inflation data i.e., PCE for January was brushed aside as the curve bull-flattened with movements more pronounced in the longer tenures. The benchmark 10-year UST yield had backed down from highs above 1.60% to close the month at 1.40% (highest since February 2020) on continued concern that macro recovery momentum amid extremely accommodative monetary environment together with the upcoming fiscal stimulus may engender higher consumer price inflation. In any case, on top of suspected short covering and month-end rebalancing, UST also took favour from stronger Treasuries elsewhere including in Australia where RBA announced unexpected purchase of 10yr government bonds. However, underlying UST strength remains in short-term period, carried by upbeat US growth with House of Representatives passing Biden’s USD1.9tn fiscal package, and in China where a PBOC adviser said 1Q21 GDP may exceed 15% and full year growth at 9.0% (+2.3% in 2020).

In the Malaysian govvies space, the price of domestic MGS issues ended the month lower with the benchmark 3-year closed at 1.98% and the closely watched 10-year MGS yields jumped to 3.09%, the highest level since April 2020. The recent reflation trade signals seen in global bonds is believed to push Malaysia’s yield curve higher and steeper for now with the 10yr-3yr yield spread expanded (yield curve steepened) as the long-end underperformed. Three auctions conducted in February:

I. 5-yr Reopening of MGII 03/26, RM4.5bn

II. 20-yr Reopening of MGS 05/40, (RM2.0bn auction + RM2.0bn private placement)

III. 7-yr Reopening of MGII 09/27, RM3.5bn

Opportunity arises as MGS/GII yield spike tracking the global bond yields movement

Risk-on sentiment on the global front drove risk appetite in the local bond space, with some buying demand seen amongst MGS benchmarks as trading activity picked up. But this soon shifted following the recent BNM MPC statement’s that was very neutral on the policy stance. BNM held the OPR unchanged at 1.75% as widely expected but market reaction was muted. The policy statement sounded more upbeat about the economic outlook as oil prices remained strong and vaccine rollouts allows the slow but sure removal of movement restrictions. We maintain our view that the BNM will remain on hold for the remainder of 2021.

Bond markets continue to be under pressure with UST curve steepening further and the 10yr touching a high of 1.62% while equity space recovered slightly as bargain hunters emerged. Over in the local markets, there was another round of meltdown in the local govvies market as investors continued dumping the papers. The main driver for the weak performance in Malaysian bonds was the continued UST yields surge. The spill over effect from the spike in US yields saw the local MGS yields spike as Malaysia’s bond market followed suit, albeit on a less steep degree. The yield spike is more substantial towards the longer end of the curve with the benchmark 10yr MGS yield moved from 2.65% at the start of the year to as high as 3.34%, a rise of 69 basis points, the highest level in a year. Consequently, the yield spike has inflicted drawdowns for bond prices. While the notion of inflationary pressures in Malaysia remains muted in the near term, inflation may make a comeback on the back of pent-up demand, which could have also affected market sentiment.

Overall, market sentiment was weighed down by the recent BNM MPC statement’s that was very neutral on the policy stance while giving a more upbeat outlook as compared to previous MPC meeting. Despite domestic challenges, we think Malaysia’s government bonds remain attractive as capital flows into emerging markets remain strong given low global interest rates and high market liquidity that boosts positive carry-trades. Malaysia bonds still offer some of the more attractive yields on a real yield basis and relative basis compared to global bond yields. We expect investors to take advantage and lock in higher yields in Malaysia bonds.

FTSE Russell will be conducting its Fixed Income Country Classification Review end of this month. We maintain our view that the exclusion risk for Malaysia remains low, although it could still be retained on the watch list for the time being.

Source: BIMB Securities Research - 9 Mar 2021