• Foreign holdings of MYR debts securities declined to RM243.8bn in July

• Foreigners sold RM3.5bn of MGS but bought RM0.4bn of GII

• Total portfolio outflow of RM4.9bn for equities and debt securities combined

• Local political and COVID-19 developments maintained a firm grip on the Malaysia bond market sentiment

Total foreign holdings of Malaysia debt securities slipped to RM243.8bn at end-July as foreign investors continued to pare down their holdings of Malaysian debt securities by the most since March 2020 (Jul: -RM3.6bn; Jun: -RM0.5bn; May: +RM1.8bn; Apr: RM6.4bn).

Looking into details, foreigners sold MGS totalling RM3.5bn (Jun: +RM0.4bn; May: RM2.4bn; Apr: RM4.7bn) and bought GII amounting RM0.4bn (Jun: +RM0.3bn; May: -RM0.7bn; Apr: +RM0.5bn). As a result, foreign holdings of MGS declined to RM188.6bn or 40.4% of total MGS outstanding and foreign holdings of GII increased to RM31.2bn or 7.8% of total GII outstanding. However, foreign holdings of government bonds (MGS & GII) declined for the first time in 15 months by RM3.1bn to RM219.8bn as at end-July. This brought foreign shareholdings of Malaysian government bonds to a 5-month low of 25.3% from 25.7% in Jun. Meanwhile, other debt instruments that succumbed to foreign selling in July were Treasury Bills, conventional and Islamic (-RM0.6bn), and private Sukuk (-RM0.05bn).

As at end-July 2021, foreign investors sold RM3.6bn of Malaysian bonds (Jun: - RM0.5bn; May: +RM1.8bn; Apr: +6.4bn). Meanwhile, July marked the 25th consecutive month of foreign outflows from equities at RM1.3bn (Jun: -RM1.2bn; May: -RM0.2bn; Apr: -RM1.1bn). Domestic institutions turned net buyers in July at RM0.5bn (Jun: -RM0.5bn), and so were domestic retail investors at RM0.8bn (Jun: +RM1.7bn), their 25th sequential month of net buy since July 2019. As a result, Malaysia recorded a larger overall foreign portfolio flows of RM4.9bn (Jun: -RM1.7bn; May: +RM1.6bn; Apr: +RM5.3bn) in July. Since the beginning of 2021, the cumulative bond inflows were RM20.9bn (Jan-Jul 2020: RM1.3bn) whilst foreign outflows from Malaysian equities amounted to RM5.5bn (Jan-Jul 2020: -RM18.9bn). This resulted in net inflows of RM15.4bn in the first seven months of 2021 (Jan-Jul 2020: -RM17.6bn).

Bank Negara Malaysia’s international reserves was unchanged at USD111.1bn as at 30 July 2021. The reserves position is sufficient to finance 8.1 months of retained imports and is 1.1 times total short-term external debt. In ringgit terms, the BNM reserves grew by RM0.2bn to RM461.8bn.

UST bond yields fell, as softer-than-expected inflation data fed the view that the Federal Reserve could delay its exit from quantitative easing, For July, UST 10-yr bond yield have fallen 26bps, the largest monthly decline since April 2020, and closed at 1.2223%, the 5th consecutive week of decline. US Fed made a subtle change to the FOMC statement with a new sentence stating “the economy has made progress toward these goals (i.e., maximum employment and price stability), and the Committee will continue to assess progress in coming meetings”. July’s FOMC saw the Fed signaling upbeat growth prospects for the medium to longer term but passed discussion on QE tapering to future FOMC meetings as Chair Powell indicated there is still “some ground to cover to get there” amid ongoing COVID risks. UST players were cautious as the Fed acknowledged that longer term steps towards tighter policy remains in queue as the economy is likely to show improvements with vaccination progress in place.

There were hints of month-end demand including from offshore on maturities up to 15-yr but overall sentiment in the MGS+GII space was limited by questions on fiscal policy and ahead of Aug auctions. Final week of the month saw local bond market stabilized as selling pressure subsided, but trading activities remain subdued as market participants were generally cautious on the recent development of domestic political scene. MGS and GII yields mostly increased in the final week, moving between -0.5bps to 8.7bps overall. The 10-yr MGS end the month lower by 11bps at 3.172%, its highest level in two weeks, from June’s 3.285%. Three auctions conducted in July:

1. 15-yr Reopening of MGII (Mat on 07/36), RM4.5bn (RM2.5bn auction + RM2.0bn pp)
2. 5-yr Reopening of MGS 11/26, RM5.0bn
3. 10-yr Reopening of MGII 10/30, RM5.5bn (RM3.5bn auction + RM2.0bn pp)

Local political and COVID-19 developments maintained a firm grip on the Malaysia bond market sentiment

Demand for MGS/GII remained relatively muted, given cautious market sentiment amid Malaysia’s COVID-19 condition and political uncertainty. However, domestic yields increased on the back of a rise in UST yields. Domestic yields may rise in reaction to higher UST yields, but this will likely be capped by prevailing concerns regarding the domestic COVID-19 condition and political uncertainty. Safe-haven demand for UST was initially strong amid ongoing fears regarding the Delta variant and lingering growth concerns. However, yields began to rise due to strong US employment data. UST yields may trend range bound-to-higher, driven by the strong US employment data but likely capped by COVID-19 concerns.

Hence, foreign demand for Malaysian bonds will likely remain pressured in the near-term due to the domestic COVID-19 condition and ongoing political ambiguity. In the mediumterm, yields will still likely return to an uptrend as vaccination momentum continues and Movement Control Order measures are relaxed in line with the National Recovery Plan. The persistently high level of COVID-19 cases and ongoing lockdown measures will likely supress foreign demand for Malaysian bonds in the near-term. However, in the medium-term we expect foreign inflows to return as lockdown measures are eased and as yield differentials remain attractive.

Source: BIMB Securities Research - 11 Aug 2021