• Foreign holdings of MYR debts securities increased to RM266.4bn
   
• Foreigners bought RM1.1bn of MGS and RM0.1bn of GII
   
• Foreign investors sold RM1.2bn in equity market

• Total portfolio outflows of RM0.8bn for equities and debt securities combined

• Expect better demand for Malaysia bonds as investors seeking higher yields may start reallocating their portfolios

Foreign investors continued to buy into Malaysia’s debt for the second month in a row with a smaller net foreign purchases of RM0.6bn (Mar: +RM1.7bn) driven mainly by strong demand for Malaysian Government Securities (MGS). As a result, the total foreign debt holdings increased to RM266.4bn in March (Feb: RM265.8bn), bringing its share of the total outstanding debt to 13.0%, (Mar: 13.1%), its lowest level since June 2020 (12.8%).

Looking into details, foreign investors bought MGS by +RM1.1bn (Mar +RM0.8bn; Feb: +RM0.5bn) while GII recorded a smaller inflow of RM0.1bn (Mar: +RM1.4bn; Feb: -RM2.2bn). With that, foreign holdings of government bonds (MGS+GII) rose for the second straight month by RM1.2bn to RM252.8bn or 21.4% of total bonds outstanding (Mar: +RM2.2bn to RM251.7bn), which made up 21.4% of total bond outstanding (Mar: 21.7%), the lowest level since April 2020. Individually, foreign investors held RM203.5bn of MGS, however the foreign holdings share continued to decline to 32.8% (Mar: 33.2%). Non-residents owned RM49.3bn of GII or 8.8% of total GII outstanding as of end-April. Meanwhile, foreigners sold MITB including Islamic Tbills by -RM0.2bn and Private Debt Securities (PDS) including Private Sukuk by - RM0.4bn.

As at end-April 2024, foreign investors bought RM0.6bn of Malaysian bonds (Mar: +RM1.7bn; Feb: -RM1.2bn). Meanwhile, foreign investors remained net sellers on Bursa Malaysia as investors sold RM1.4bn of equity in April (Mar: -RM2.9bn; Feb: +RM1.3bn). As a result, Malaysia recorded overall foreign portfolio outflow of RM0.8bn in April 2024 (Mar: -RM1.2bn; Feb: +0.1bn; Jan: -RM4.3bn). Cumulatively, YTD, foreign portfolio outflows amounted to RM6.3bn (4M23: +RM10.8bn), purely lifted by outflows from debt securities (4M24: -RM4.0bn, 4M23: +RM12.9bn). Foreign selling of Malaysian equities accumulated to RM2.3bn in 4M24 (4M23: -RM2.1bn).

Bank Negara Malaysia’s international reserves fell for the third straight month by USD1.0bn or -0.9% MoM to a five-month low of RM112.8bn as of end-April 2024. The decline was primarily attributed to a continued drop in foreign currency reserves (-USD0.7bn to USD100.6bn) which decreased for the third consecutive month. In ringgit terms, the value of BNM reserves decreased by RM4.7bn to reached the second-highest level on record of RM534.3bn. The current reserve is sufficient to finance 5.5 months of imports of goods and services and is 1.0 time total short-term external debt.

UST rallied in a bull flattener manner, as markets continue to price in the lack of an upside in the PCE deflator data, after sharp US Treasury (UST) weaknesses over the past month. The UST yields edged upwards as stronger-than-anticipated US labor cost data fuelled expectations that the Fed will maintain higher interest rates for a prolonged period. Two jobs report presented a softer view on the US labor market. ADP April employment showed private payrolls added 192k jobs compared to a consensus forecast of 183k and an upwardly revised 208k in March. Meanwhile, JOLTS’s March job availability fell to a three year low of 8.49mn, undershooting consensus expectations of 8.68m. Voluntary resignations, which is seen as indicator for employee’s confidence in the job market, fell to a fresh three year low of 2.1% from 2.2% in February. The benchmark 10yr UST yield was higher for the month at 4.68%. Yields of the regional bonds closed higher for the month. MGS rallied though in a relatively thin trading session as markets stood relatively cautious given the volatile rate pathway recently, ahead of US data risk. IndoGB continued to shift higher with overall yields closing higher for the month and 10Y yield closed at 7.25%. ThaiGB also rallied and saw its 10Y yield closed higher at 2.76%. Similarly, Singapore 10Y yield also settled higher at 3.45%.

The bond sentiment was cautious, with the 10Y UST trading above 4.600% ahead of FOMC, NFP, and US unemployment data. Local govvies were mixed in trading on the last day of the month in a more active session, ahead of the Labor Day holiday domestically and a much anticipated US FOMC policy meeting. Malaysian Government Securities (MGS) and Government Investment Issues (GII) yields ticked higher between 12bps and 18bps, tracking the gains in UST yields, although at a slower momentum. The benchmark 5Y MGS saw its yield little changed for the session to 3.78% while the benchmark 10Y MGS was higher in yield at 3.98%.

Throughout April 2024, there were four sovereign papers auctioned with a total of RM19.5bn issuance.

I. 5-yr Reopening of MGS 08/29, RM5.0bn

II. 7.5-yr New Issue of MGII (Mat on 10/31), RM4.5bn

III. 15-yr New Issue of MGS (Mat on 04/39), RM5.0bn (RM3.0bn auction + RM2.0bn private placement)

IV. 3-yr Reopening of MGII 09/26, RM5.0bn

Outlook

Investors have been on edge recently over when and how many times the Fed will cut interest rates. In its 30 April-1 May meeting, the Fed FOMC unanimously agreed to leave the target range for the FFR unchanged at 5.25-5.50%. Fed Chair Powell said while gaining confidence on inflation progress may take longer than previously expected, he expects further price growth cooling to resume this year, but avoided offering a timeline for rate cuts. The Chair also said it’s unlikely their next policy rate move would be a rate hike, saying that its inflationemployment joint goals have moved into ‘better balance’ over the past year. Comments from Fed Chair Powell was not as hawkish as markets feared, spurring UST to a rally.

The latest FOMC decision and Powell’s commentary continued to espouse the message of patience that rates may stay elevated for longer until it has gained greater confidence that inflation is moving sustainably towards the 2% objective while Powell firmly kept the thoughts of resuming rate hikes at bay. Our view now is that the Fed will keep its current FFTR unchanged at 5.25-5.50% and maintain this level for longer beyond Jun and therefore our base case for the first rate cut to occur at the 18 September FOMC meeting. A pushback in the base case for rate cuts translates to an uplift in our 10Y UST outlook. UST yields will remain high and expected to be sticky in 2Q24.

The local bond market recovered slightly despite the sticky US PCE. Nonetheless, we think the market players will remain cautious about the near-term outlook for the local bond space. We anticipate a cautious trading for bonds but remain optimistic about the prospects for local government bonds, buoyed by renewed confidence in potential Fed rate cuts. 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. The expectation of stable inflation rates, unchanged monetary policy, and the potential for the ringgit to appreciate to its fair value make local government bonds appealing to foreign investors. Still, we will watch for inflation trajectory, which will likely rise further due to planned restructuring in fuel subsidies to a targeted mechanism. But the cost-pushed nature of inflation is unlikely to cause rate hike, and less likely for local bonds to reprice significantly, although a moderate upward repricing in yields is still possible, depending on the pace of adjustments.

Source: BIMB Securities Research - 10 May 2024