• Foreign holdings of MYR debts securities increased to RM272.6bn

• Foreigners bought RM3.3bn of MGS and RM2.3bn of GII

• Foreign investors turned net buyers in equity market

• Total portfolio inflows of RM7.0bn for equities and debt securities combined

• Foreign buying could be volatile depending on global and regional risk sentiment

Foreign inflows made a comeback in November as foreign investors turned net buyers of Malaysia’s debt securities in November (RM5.4bn; Oct: -RM2.6bn) for the first time in four months, bringing the accumulated total foreign holdings of Malaysia debt securities to RM272.6bn or 13.6%.

Looking into details, November’s inflow was driven by almost all types of Malaysian debt securities. Foreign investors bought MGS (Nov: +RM3.3bn; Oct: -RM1.6bn; Sep: -RM0.5bn) due a sharp drop in US bond yields. GII recorded highest inflow in five months as foreigners bought RM2.3bn of GII (Oct: -RM0.2bn; Sep: +RM0.5bn). With that, foreign holdings of government bonds (MGS+GII) increased by RM5.6bn to RM255.9bn or 23.1% of total bonds outstanding (Oct: -RM1.8bn to RM250.3bn or 22.7%). Individually, foreign investors held RM203.0bn of MGS , or 35.0% of total MGS outstanding and RM52.9bn of GII or 10.0% of total GII outstanding as of endNovember. Meanwhile, foreigners also bought Private Debt securities (PDS) (Nov: +RM0.3bn; Oct: -RM0.4bn) whilst continued demand by foreign investors in MTB saw an inflow of RM0.6bn for the month. On the other hand, foreigners sold Malaysian Islamic Treasury Bills (Nov: -RM1.1bn; Oct: -RM0.4bn).

As at end-Nov 2023, foreign investors bought RM5.4bn of Malaysian bonds (Oct: - RM2.5bn; Sep: -RM4.5bn). Meanwhile, foreign investors reverted to buying RM1.6bn equities in November from RM2.0bn net sales in October (Oct: -RM2.0bn; Sep: +RM0.7bn), which were sizeable compared to net inflows in September. As a result, Malaysia recorded overall foreign portfolio inflow of RM7.0bn in November (Oct: - RM4.5bn; Sep: -RM3.8bn). Cumulatively, YTD, foreign portfolio inflows amounted to RM23.5bn (11M22: -RM3.2bn), purely lifted by inflows into debt securities (11M23: +RM25.8bn, 11M22: -RM8.9bn). Foreign selling of Malaysian equities accumulated to RM2.3bn in 11M23 (11M22: +RM5.7bn).

Bank Negara Malaysia’s international reserves rebounded by USD3.8bn or 3.5% MoM, reaching a threemonth high of USD112.3bn as of end-November. The increase was mainly attributable by a sharp rebound in the foreign currency reserve (+USD3.7bn to USD100.2bn) which climbed back above the USD100.0bn level. In ringgit terms, the value of BNM reserves increased sharply by RM17.8bn to RM527.2bn. It is sufficient to finance 5.4 months of imports of goods and services and is 1.0 times total short-term external debt.

UST curve shifted higher, as month-end rebalancing and profit taking activity following FedSpeaks and the release of the Fed’s preferred inflation indicator i.e.; core PCE for October. Price action was led by traders that pared down wagers for substantial rate cut expectations after San Francisco Federal Reserve President Mary Daly comments stating that it was too premature to declare victory against inflation. Another Fed official, John Williams of the New York Fed, said that the Fed Funds Rate at 5.25-5.50% is at the peak of the target range but needs to remain restrictive to bring inflation back to the 2.0% longerrun goal. In the month of November, UST yields fell 40-50 bps on expectations the Fed may be done hiking and is set to cut rates extensively next year. The curve shifted higher as overall benchmark yields climbed across. The UST 2Y yield rose to 4.68% whilst the muchwatched UST 10Y jumped the most to 4.33%. The 2s10s spread continued to reduce its inversion to -35bps. Regional bonds mostly rallied and 10Y yields fell. Overall ThaiGB curve bull flattened though 10Y yields ended the month at 2.95%, as the BOT shifted its growth forecasts for 2023 downwards. The IndoGB curve steepened and 10Y yields closed the month lower at 6.63%, amid earlier signals by BI of an extended policy rate hold in 2024.

Local govvies continued to trend steadily stronger; with sporadic buying seen going into the month-end. Overall benchmark MGS/GII yields closed lower with both the benchmarks 5Y MGS and 10Y MGS yields settled lower at 3.62% and 3.82% respectively. MGS rallied with demand seen in the long end of the curve. Similar to their moves in September, the yields followed the Fed’s tight policy narrative

Throughout November 2023, there were three sovereign papers auctioned with a total of RM15.0bn issuance.

Outlook

UST curve bull-steepened and led global yields lower as market begins to take a more balanced view on rates outlook. UST yields declined due to the dovish repricing in US rates, and the big picture here is that local rates are unlikely to continue experiencing upward pressures if the US economy and the Fed are indeed beginning to take a turn to the south although the future path will always be data dependent. Ringgit government bonds strengthened but by a much smaller margin vs global bond. Essentially, profit-taking actions intersected with net buying flows. One major factor to the smaller MGS gain, in our opinion, is that BNM is widely anticipated to hold the OPR next year whilst global central banks may undertake large rate cuts. This shift is likely to encourage bond investors to progressively divert their investments away from the US debt market and towards high-yielding emerging market assets. With its robust fundamentals, positive growth outlook, and the absence of rate cuts on the central bank's agenda, Malaysia is well positioned to attract significant capital inflows. The spread between the 10Y MGS over the UST is around -50 bps, and we noted that MGS yields had already fallen 20-30 bps in the past month. Considering the above factors, we anticipate MGS vs UST spread to largely sustain near current levels. Given our bullish outlook for the ringgit and the expectation that the BNM may keep the OPR unchanged, demand should be decent as investors may continue to increase their portfolio exposure to Malaysian debt to capitalise on carry returns and potential capital appreciation.

Source: BIMB Securities Research - 11 Dec 2023