● Foreign investors turned net sellers of Malaysia’s debt securitiesinJune(-RM4.1b; May: RM0.5b), the largest outflow in over 2-years

- Recorded a quarterly net outflow in 2Q22 (-RM5.8b; 1Q22: RM2.6b) for the first time since 1Q20 (-RM16.9b).

- Total foreign debt holdings fell to a 7-month low (RM253.3b; May: RM257.5b), with its share to total outstanding debt decreasing to 14.0% (May: 14.4%).

- Foreign demand for domestic debt was pressured by deteriorating global risk sentiment and the larger-than-expected US Fed rate hike in June. US Treasury yields moved considerably higher and narrowed MGS-UST yield spreads to its lowest levels in over 3 years, making domestic bonds less attractive to foreign investors.

● The outflow was driven by a considerable decrease in holdings of Government Investment Issues (GII), as well as anet sell-off of Malaysian Government Securities (MGS) and Malaysian Treasury Bills (MTB), which outweighed an increase in holdings of Malaysian Islamic Treasury Bills (MITB)

- GII (-RM3.4b; May: -RM0.2b): foreign holdings share to total outstanding bonds fell to a 9-month low (9.2%; May: 10.1%).

- MGS (-RM0.9b; May: RM0.5b): foreign holdings share fell to a 2-year low (36.5%; May: 37.4%).

- MTB (-RM1.0b; May: RM0.5b): foreign holdings share declined to 55.8% (May: 60.6%).

● For the equity market, foreign investors turned net sellers for the first time in 6 months (-RM1.3b; May: RM0.1b)

- Emerging market equities were broadly pressured in the face of aggressive tightening by the US Fed and other major central banks, leading to heightened volatility across global financial markets.

● Overall, the capital market recorded its largest outflow in 27 months (-RM5.4b; May: RM0.6b)

● Bond outflows expected to persist over 2H22 and may worsen in July, as the Fed continues to raise interest rates

- The 10-year US Treasury average yield rose by 22 basis points (bps) to 3.11% in June, whilst the 10-year MGS average yield fell by 7 bps to 4.25%, narrowing the average yield spread to 114 bps (May: 142 bps), its lowest level in almost 4 years.

- We expect a greater net bond outflow in July, as the US Fed likely raises rates by another 50–75 bps, global risk-off sentiment intensifies on recession concerns, and as RM19.0b worth of domestic bonds are scheduled to mature, the largest amount of the year. Nonetheless, we reckon some bond inflows may return in 4Q22 on fewer scheduled government bond maturities and as the pace of Fed hikes possibly eases at the very end of the year. With that said,we have raised our year-end USDMYR forecast to 4.35 (2021: 4.17) from 4.28 previously.

- BNM is expected to raise rates by 25 bps at each of its two remaining meetings this year and at one meeting in 1Q23, which would bring the peak overnight policy rate to 3.00% in 2023.

Source: Kenanga Research - 12 Jul 2022