Foreign flows eased in September

Foreign holdings of MYR debts securities increased to RM251.0bn in September

Foreigners sold RM2.4bn of MGS but bought RM2.2bn of GII

Total portfolio inflow of RM1.3bn for equities and debt securities combined

Yields to rise on loosened restriction measures and higher UST yields

Total foreign holdings of Malaysia debt securities increased to RM251.0bn at end-September. Malaysia’s overall foreign portfolio flows rose by RM1.3bn in September (Aug: +RM7.7bn) as there was a declined in purchases of both domestic debt securities (+RM0.6bn) and equities (+RM0.7bn) last month.

Looking into details, foreigners sold MGS totalling RM2.4bn (Aug: +RM3.1bn; Jul: - RM3.5bn) and bought GII amounting RM2.2bn (Aug: +RM3.2bn; Jul: +RM0.4bn). This resulted in foreign holdings of Malaysian government bonds (MGS & GII) declined by RM0.2bn to RM225.9bn as at end-September, which was equivalent to 25.8% of total outstanding. For MGS, foreign investors held RM189.3bn or 40.3% of total MGS outstanding as at end-Sep while foreign holdings of GII accumulated to RM36.6bn or 9.0% of total GII outstanding. Foreign holdings of discount instruments increased by RM0.4bn to RM10.9bn whilst foreign holdings of PDS also increased by RM0.4bn to RM14.3bn. As a result, in combined amounts (inclusive of short-term bills/notes and corporate bonds/sukuk), foreign holding levels in September 2021 were higher by RM0.6bn, bringing total foreign ownership of MYR bonds to RM251.0bn or 14.6%.

As at end-Sep 2021, foreign investors bought RM0.6bn of Malaysian bonds (Aug: +RM6.6bn; Jul: -RM3.6bn). Meanwhile, foreign investors remained net buyers in Sep, which saw a narrower net inflow of RM0.7bn (Aug: +RM1.05bn; Jul: -RM1.3bn). Domestic institutions turned net sellers in Sep at RM1.7bn (Aug: -RM1.5bn; Jul: +RM0.5bn), whilst domestic retail investors bought RM0.9bn (Aug: +RM0.5bn; Jul: +RM0.8bn), their 27th sequential month of net buy since July 2019. As a result, Malaysia recorded a narrower overall foreign portfolio inflow of RM1.3bn (Aug: +RM7.65bn; Jul: -RM4.9bn) in Sep. Since the beginning of 2021, the cumulative bond inflows were RM28.2bn (Jan-Sep 2020: RM4.8bn) whilst foreign outflows from Malaysian equities amounted to RM3.8bn (Jan-Sep 2020: -RM22.4bn). This resulted in YTD 2021 net inflows of RM24.3bn (Jan-Sep 2020: -RM17.6bn).

Bank Negara Malaysia’s international reserves eased by USD1.1b or -0.9% mom to USD115.2bn as at September 30, compared to USD116.3b as at Aug 30. This decline was attributable to a drop in foreign currency reserves (-USD0.9bn or -0.9% mom to USD102.5bn), and other reserve assets which reverted into a contraction (-USD0.1bn or -3.8% mom to USD3.0bn). In ringgit terms, the value of BNM reserves registered its first decline in nine months, falling by RM1.1bn or -0.2% mom to RM482.5bn, partly due to the strengthening of the ringgit. The reserves position is sufficient to finance 8.2 months of retained imports and 1.3 times total short-term external debt.

The UST market ended the month mixed with gains at the short-end while selling pressure seen at the long end of the curve. Bond yields have been steadily rising after the US Fed revealed its latest intention to taper asset purchases and provide direction on rate hike path last week. The benchmark UST 2-year; reflective of interest rate predictions, rose 7bps for the month to 0.2755%. The benchmark 10-year yield added 18bps in September to close at 1.4873%, on a bearish end to the month of September, but off its 1.5652% monthly high, amid concerns about persisting inflation. Wider movements in yields were absent as we think sentiment remained guarded as UST players focused on the direction of fiscal and monetary policy. Recent Fed-speak have mostly been on the more hawkish side, while congress is still deliberating on the infrastructure and spending bills though policymakers had narrowly avoided a government shutdown (extending government funding through 3- Dec). In their latest meeting, the FOMC signalled the possibility of QE tapering starting in Nov. Fed-speak is generally showing signals of a Fed paving the way for eventual tightening. Fed chief Powell says he is “very pleased” not to have seen labor-market scarring or the mass failure of small businesses over the past 18 months.

Malaysian government bonds posted gains as the run-up in UST yields halted, though remaining near recent highs, and merged with month-end demand in the domestic space. The 3-year and 10-year yields closed at 2.47% and 3.381% respectively. The 10yr-3yr yield spread was at 91bps, 5bps higher for the month. Three auctions conducted in September:

I. 20-yr Reopening of MGII 09/41, RM4.5bn (RM2.5bn auction + RM2.0bn pp)

II. 10-yr Reopening of MGS 04/31, RM5.5bn (RM4.0bn auction + RM1.5bn pp)

III. 5-yr Reopening of MGII 03/26, RM4.0bn

Yields to rise on loosened restriction measures and higher UST yields

Foreign investors resumed their net buying activities in September due to their increased confidence in Malaysia’s economy. Foreign demand has been strong with fairly consistent buying of MGS+GII totalling RM23.8bn in 9M21 (2020: +RM4.4bn), but we reckon this may turn choppy in the next 3-6 months as the Fed starts QE Taper and scales back monetary accommodation.

UST market weakened and the 10-year UST scaled up to above 1.5%. We expect caution to sustain in the UST market and markets will remain focused on monetary tightening concerns. Recent Fed-speak has mostly been on the more hawkish side. The recent FOMC stated the possibility of QE tapering starting in Nov and Fed-speak since the FOMC was generally signalling Fed paving the way for eventual tightening. Meanwhile, the debt ceiling remains an immediate risk though US yields in range is a reflection of market expectation that the delay is but bluster for the voters. US Treasury secretary Yellen said that the government will run out of cash on 18 Oct. Without the support from Republicans, the Democrats will have to raise the debt ceiling via the budget reconciliation route which is tied to the USD3.2tn spending package. This will be a bigger factor for markets. We think a major impetus for the upbeat view for the US economy is that the country is on the cusp of implementing very large fiscal stimulus spending. Hence, news on this front will also be in focus.

Malaysian government bond market stayed after UST climbed above the 1.50% level. Domestic yields may return to an uptrend, as local restriction measures continue to be relaxed and tracking a potential rise in UST yields, as the US debt ceiling issue persists. In the medium to long-term we expect domestic yields to rise further, as the US Fed possibly announces tapering in November. We believe foreign demand for local bonds will sustain in the near term, although it may be tempered by the Fed’s expected tapering announcement. Malaysian bonds will be supported by domestic political stability, the further relaxation of restriction measures, and high yield differentials. However, inflows may begin to reduce from November on the Fed’s expected tapering announcement.

Furthermore, the short-term risk to the market is there’s a large supply of incoming bonds. There are four scheduled auctions scheduled for Oct, when there were three auctions each in Aug and Sep. Additional local debt supply concerns coupled with market chatter over a potential rate hike and also the anticipated withdrawal of asset-tapering exercise in US may continue to see MYR bonds drift weaker. However, expect MYR bonds to be supported due to well-diversified and depth of institutional-based investors; despite a general view on supply concerns. Main focus for the month would be Budget 2022 which will be tabled on the 29th October, 2021.