● Foreign investors turned net sellers of Malaysia’s debt securities for the first time in 14 months (-RM0.5b; May: RM1.9b)

• Total foreign debt holdings decreased slightly in June (RM247.4b; May: 247.9b) with its share to total outstanding debt falling to 14.6% (May: 14.8%), a 3-month low.
• Attributable to growing risk-off sentiment amid elevated local COVID-19 cases, concerns regarding the spread of the Delta variant, and the extension of domestic lockdown restrictions. Additionally, the US Fed’s hawkish turn has likely impacted foreign demand for short-term bonds.

● Outflow was driven by a net sell-off of Malaysian Treasury Bills (MTB), a decrease in holdings of Bank Negara Monetary Notes (BNMN) due to reaching maturity, and a smaller increase in holdings of Malaysian Government Securities (MGS), which outweighed a rise in holdings of Government Investment Issues (GII)

• MTB (-RM1.1b; May: -RM0.1b): foreign holdings share of total outstanding bonds fell to 55.1% (May: 66.4%), a 9-month low.
• BNMN (-RM1.0b; May: RM0.0b): decreased due to reaching maturity; foreign holdings share at 0.0% (May: 100.0%).
• MGS (RM0.4b; May: RM2.4b): foreign holdings share decreased to a 5-month low (40.4%; May: 41.1%).
• GII (RM0.2b; May: -RM0.6b): foreign holdings share remained at 7.9% (May: 7.9%).

● For the equity market, outflows persisted for 2 consecutive years

• Foreign selling in Bursa Malaysia accelerated in June (-RM1.2b; May: -RM0.2b), to a 9-month high, amid rising local COVID19 cases, the extension of Phase 1 lockdown measures, and ongoing domestic political uncertainty.

● As a result, the overall capital market registered its first outflow in 9 months (-RM1.7b; May: RM1.7b)

● Foreign demand for domestic debt to remain pressured in the near term, which may prompt continued outflows

• The US 10-year Treasury average yield fell by 11 basis points (bps) to 1.49% in June, whilst the 10-year MGS average yield was up by 10 bps to 3.26%, further widening the average yield spread to 177 bps in June (May: 155 bps).
• Outflows may persist in the near-term due to sustained concerns regarding elevated local COVID-19 cases, the spread of the Delta variant, and the implementation of Enhanced Movement Control Orders in several states. Nevertheless, domestic bonds remain supported by high yield differentials and the recent reaffirmation of Malaysia’s sovereign credit ratings. As such, we expect foreign inflows to return in the medium-term as lockdown measures are eased in the following months, and we maintain our end-2021 USDMYR forecast at 4.03 (2020: 4.02).
• We continue to expect BNM to hold the overnight policy rate at 1.75% for the rest of the year, however, the probability of a rate cut would rise should lockdown restrictions be further extended.

Source: Kenanga Research - 12 Jul 2021