• Foreign Holdings of MYR Debts Securities Declined to RM264.1bn
   
• Foreigners Bought RM0.5bn of MGS and Sold RM2.2bn of GII
   
• Foreign investors bought RM1.3bn in equity market

• Marginal total portfolio inflows of RM0.1bn for equities and debt securities combined

• Stable BNM outlook could lend supports to Malaysia government bonds

Malaysia’s foreign portfolio outflows persisted for the third consecutive month in February 2024. Foreign investors continued to sell Malaysia's debt securities in February, albeit at a much slower pace of -RM1.2bn mainly driven by a sell-off in Government Investment Issues (GII) and Malaysian Islamic Treasury Bills (MITB). As a result, the total foreign debt holdings decreased to RM264.1bn in February (Dec: RM265.3bn), bringing its share of the total outstanding debt to a 13-month low of 13.0% (Jan: 13.1%).

Looking into details, foreign investors bought MGS by +RM0.5bn (Jan: -RM1.8bn; Dec: -RM0.1bn). GII recorded a bigger outflow of RM2.2bn of GII (Jan: -RM0.7bn; Dec: - RM2.2bn). With that, foreign holdings of government bonds (MGS+GII) decreased by RM1.7bn to RM249.5bn or 21.7% of total bonds outstanding (Jan: -RM2.5bn to RM251.2bn or 22.2%). Individually, foreign investors held RM201.6bn of MGS, or 33.3% of total MGS outstanding while GII experienced its largest outflow in 20 months of RM2.2bn, diminishing the foreign holdings share to 8.8% (Jan: 9.3%), marking the lowest point in a year. Foreigners also sold MITB by -RM0.4bn but bought Private Debt Securities (PDS) including Private Sukuk by RM0.8bn.

As at end-February 2024, foreign investors sold RM1.2bn of Malaysian bonds (Jan: - RM5.1bn; Dec: -RM2.2bn; Nov: +RM5.4bn; Oct: -RM2.5bn). Meanwhile, foreign investors remained net buyers on Bursa Malaysia for the fourth straight month in February at RM1.3bn, almost double the amount in January (Jan: +RM0.8bn; Dec: +RM0.2bn; Nov: +RM1.6bn; Oct: -RM2.0bn). As a result, Malaysia recorded overall a marginal foreign portfolio inflow of RM0.1bn in February 2024 (Jan: -RM4.3bn; Dec: - RM2.0bn; Nov: +RM7.0bn; Oct: -RM4.5bn).

Bank Negara Malaysia’s international reserves reverted to a downtrend, declining by USD0.5bn or -0.4% MoM to a two-month low of RM114.3bn as of end-February 2024. The decline was mainly attributed to a slight reduction in foreign currency reserves (-USD0.4bn to USD101.8bn) which recorded it first drop in four months. In ringgit terms, the value of BNM reserves declined by RM2.7bn to RM524.4bn. The current reserve is sufficient to finance 5.4 months of imports of goods and services and is 1.0 time total short-term external debt.

There was a sharp sell-off in US Treasuries (USTs) on fears of re-accelerating inflation, after a solid monthly employment report and higher than expected CPI and PPI for January. February saw weakness in the USTs and other global bond markets, given Fed and ECB policymakers’ comments that there will not be a start to the next cycle of interest rate cuts so long as they see elevated inflation risks. Overall, UST yield curve bearishly flattened between 26bps and 38bps as investors remained focused on deciphering the future course of Fed’s monetary policy. The benchmark 10yr UST yield ended the month at 4.25%. Regional bonds performed mixed with IndoGB saw selling pressure. The 10Y yield shifted up and closed at 6.5%. Similarly, Singapore 10Y yield settled higher at 3.1% while ThaiGBs saw its 10Y yield closed lower at 2.56% in February.

Local govvies were mixed with small yield declines seen in longer dated maturities, while rest of the curve higher in yield. Both Malaysian Government Securities (MGS) and Government Investment Issues (GII) yields rose in the range of 3bps and 10bps, tracking the movement of UST yields. The benchmark 5Y MGS saw its yield ended the month at 3.58% while the benchmark 10Y MGS yield closed at 3.86%. The 10Y UST/MGS yield spread widened by 39bps in February (January: -21 bps).

Throughout February 2024, there were three sovereign papers auctioned with a total of RM15.0bn issuance.

I. 7-yr Reopening of MGS 04/31, RM5.0bn

II. 20-yr Reopening of MGII 08/43, RM5.0bn (RM3.0bn auction + RM2.0bn private placement)

III. 3-yr Reopening of MGS 05/27, RM5.0bn

Outlook

Fed policymakers recently clarified that they are eyeing rate cuts later this year. This has ensued in a modest rally for the UST with both MGS and GII yields tracking the movement of UST yields. Although a Fed cut this month is out of the picture, markets will pay attention to the statement on March 20 for clues on the path and timing of policy this year. Fed Chair Powell alluded that the central bank is getting close to the confidence it needs to start lowering interest rates, during his semi-annual testimony to Congress earlier this month. Hence, expect some consolidation in USTs after the sharp sell-off in February. The anticipated series of Fed rate cuts, set to commence in June, may prompt investors to continue accumulating high-yield US bonds in the next few months, drawn by their high returns. However, subsequently, investors seeking to sustain their returns may begin to allocate their funds towards stable, high-yielding emerging market debt, especially in countries where central banks are not expected to cut rates. Meanwhile, BNM MPC left OPR unchanged on 7 March, with no material changes to the statement. We continue to see no change in OPR for the remainder of 2024. Anticipation that BNM will hold the OPR at 3.00% throughout this year while the Fed is planning to cut could be helpful to lessen the rate differential advantage of the US over Malaysia. With domestic CPI continuing to be rather tame, and no clear developments yet as to the timing of the planned removal of petrol subsidies, local govvies should continue to remain supported.

Source: BIMB Securities Research - 11 Mar 2024