OVERVIEW

● Foreign investors turned net buyer of Malaysian government bonds in October. Foreign holdings in Ringgit denominated debt securities rebounded by 4.2% MoM (Sept: -1.6%) or rose by RM7.8b to RM192.3b the highest in 13-months. Consequently, the total foreign holding of Malaysia’s debt jumped to 14.0% from 13.4% in the preceding month. Despite the recent rise in the US treasury yield fuelled by the expectations of a more aggressive US Fed rate hike as labour market tightens, Malaysian securities are still attractive to foreigners.

● The net increased in October was largely seen across the board. Foreign holding of Private Sukuk increased sharply by 12.7% to RM7.7b in October after it fell for three consecutive months. Similarly, Malaysian Government Securities (MGS) rebounded by 3.2% to RM153.0b (Sept: -3.6%) while foreign holding of Bank Negara Bills surged 25.0% to RM5.0b (Sept: -20.0%).

● The US economy recently added 250,000 jobs in October, and the unemployment rate remained a 49-year low at 3.7%, showing a solid US economic growth which continues to push demand for US Treasury note. As a result, the US 10-year Treasury note average yield rose 16 basis points (bps) to 3.17% in October (Sept: +14 bps) while the benchmark 10-year MGS average yield inched up by 4 bps to 4.14% (Sept: +7 bps). Consequently, the MGS-US Treasury average yield spread narrowed to 98 bps from 109 bps in September. With the recent indicators in the US pointing to a robust labour market, and persistent hiring, to attract new workers firms faces wage pressures. Hence, wages rose to its fastest pace since April 2009 to 3.1% in October (Sept: 2.8%), which could reaffirm a more aggressive Fed tightening.

● On year-to-date, net total foreign holdings fell by RM14.4b (Jan-Oct 2017: -RM17.3b) while there is RM11.1b debt maturity in 4Q18 compared to RM6.4b in 3Q18. The Ringgit is expected to be under pressure by year end, but higher oil price which currently trading above USD70.0/bbl and a positive current account balance, as well as ample liquidity, may continue to support the currency. Likewise, we have revised our USDMYR end of year forecast to RM4.15 from an earlier projection of RM4.05 due to uncertainty in the global economy and the prospect of a stronger USD. For the past week, the USDMYR is trading within 4.16-4.18.

● As widely expected, Bank Negara Malaysia (BNM) in its Monetary Policy Committee meeting yesterday left the Overnight Policy Rate (OPR) unchanged at 3.25%. According to BNM, “the degree of monetary accommodativeness is consistent with the intended policy stance,” to support the domestic economy that continue to face downside risks partly due to further escalation in trade war and weakness in the mining and agriculture sector. For next year, we do not see the possibility of BNM to change its monetary stance barring unforeseen circumstances

Source: Kenanga Research - 9 Nov 2018