● Foreign investors remained net sellers of Malaysia’s debt securities for the second straight month in July(-RM3.5b; Jun: -RM4.1b), albeit to a lesser extent

- Total foreign debt holdings fell to a 12-month low (RM249.8b; Jun: RM253.3b), with its share to total outstanding debt declining to its lowest level in 20- months (13.7%; Jun: 14.0%).

- Foreign demand for local debt remained broadly pressured by global risk-off sentiment, amid the US Fed’s second successive 75 basis point (bps) rate hike and market concerns over a potential global recession.

● The outflow was led by a larger net sell-off of Malaysian Government Securities (MGS), but was partly offset by a smaller decrease in holdings of GovernmentInvestment Issues (GII) and Malaysian Treasury Bills (MTB), as well as a greater increase in holdings of Malaysian Islamic Treasury Bills (MITB)

- MGS (-RM3.3b; Jun: -RM0.9b): foreign holdings share to total outstanding bonds fell to a 10-year low (35.5%; Jun: 36.5%)

- GII (-RM1.4b; Jun: -RM3.4b): foreign holdings share decreased to an 11-month low (8.9%; Jun: 9.2%).

- MITB (RM1.3b; Jun: RM1.2b): greater inflow but foreign holdings share fell to 19.1% (Jun: 21.0%).

● For the equity market, foreign investors returned as net buyers after 1-month of outflows

- Recorded a slight net inflow of RMM0.2b in July (Jun: -RM1.3b), its largest in 3-months, despite global financial markets remaining volatile amid aggressive monetary policy tightening and recession concerns.

● Overall, the capital market recorded a smaller net outflow in July (-RM3.4b; Jun: -RM5.4b)

● Debt market may experience softer outflows in the near-term as US recession fears begin to ease

- The 10-year US Treasury average yield fell by 26 bps to 2.85% in July, whilst the 10-year MGS average yield fell by 18bps to 4.07%, widening the average yield spread to 122 bps (Jun: 114 bps).

- Foreign demand for domestic bonds may remain moderately pressured in August, amid lingering global risk-aversion, sustained hawkish signals from the Fed, and the scheduled maturity of RM8.6b worth of MGS this month. However, we expect a smaller net outflow than in July as risk sentiment may improve following the recent strong US jobs report, which has tempered fears of a US recession. Moreover, we expect bond inflows to return in 4Q22 on lesser government bond maturities and as the pace of Fed hikes begin to ease. As such, we retain our year-end USDMYR forecastat4.35(2021: 4.17).

- We continue to expect BNM 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 overnight policy rate to a neutral rate of 3.00% in 2023.

Source: Kenanga Research - 9 Aug 2022