OVERVIEW

● Foreigners return as net buyers of Malaysia’s debt securities in July up by RM4.0b (June: -RM6.7b) after declining for three-straight month. The positive bond flows data came in as a surprise given growing concerns over escalating US-China trade spat. Investors’ confidence seems to have returned on commitment of the new government to fulfil its pre-election promises in the first hundred days. YTD, net foreign selling remains high at RM16.9b.

● The bulk of July’s rebound was attributable to a net increase of RM3.5b (June: -RM6.0b) in Malaysian Government Securities (MGS), raising foreign holdings share of total MGS to RM154.4b or 40.5% (June: 40.1%). Consequently, the monthly average of local benchmark 10-year MGS bond yield declined to 4.09% (June: 4.21%) as demand rose.

● Foreigners returned in July to purchase short-dated papers namely BNM notes (+RM1.0b) and Government Treasury Bills (+RM0.1b). Meanwhile foreigners were net sellers of Government Investment Issues (-RM0.3b) and private debt securities (-RM0.3b).

● The US-China trade spat and Fed monetary policy to raise interest rate has created uncertainty in the emerging market, resulting in a shift of investors’ demand to safe haven assets, driving down the monthly average US Treasury yields to 2.87% in July compared to 2.90% in the preceding month. Meanwhile, the average yield spread between the benchmark 10-year US Treasury yield and the local 10-year MGS bond yield have reduced to 122 basis points (bps) in July from 130 bps the preceding month. With a total of RM21.0b conventional and RM16.0b sukuk bonds due for maturity in 3Q18, we expect the selloff from the bond market to persist but minimal in the coming quarter.

● Overall, we maintain cautiously optimistic outlook on the prospects of foreign fund flows into the domestic debt market in 2H18 as we believe investors’ confidence, though improving, may still be wary of the current political transition as well as the impact of the trade war. While US Federal Reserves signalled two more rates hikes each in September and December, we expect BNM to leave the Overnight Policy Rate (OPR) unchanged at 3.25% for this year to support the economy amid an impending slowdown in 2H18.

Source: Kenanga Research - 9 Aug 2018