Kenanga Research & Investment

Malaysia Bond Flows - Foreign Inflows Rose to a 6-month High in February But Tempered by Hawkish Fed

Publish date: Thu, 09 Mar 2023, 09:14 AM

● Foreign investors remained net buyers of Malaysia’s debt securities for the second straight month in February (RM4.3b; Jan: RM0.5b), with inflows rising to its highest level since August 2022

- Total foreign debt holdings rose (RM251.5b; Jan: RM247.3b), with its share to total outstanding debt increasing (13.2%; Jan: 13.1%) for the first time in seven months.

- Foreign demand appeared to be robust in early February, as evidenced by a broad decline in bond yields and strong government bond auction results; this was likely bolstered by the US Fed's modest 25 bps rate hike. However, we suspect that demand may have tapered off later in the month due to a resurgence of global risk-aversion, prompted by market expectations of prolonged Fed hawkishness.

● The greater inflow was attributable by a sizeable increase in holdings of Malaysian Government Securities (MGS) and a smaller outflow of Malaysian Islamic Treasury Bills (MITB), which outweighed a smaller increase in Government Investment Issues (GII)

- MGS (RM4.0b; Jan: RM1.3b): foreign holdings share of total outstanding bonds remained the same (34.5%).

- MITB (-RM0.4b; Jan: -RM1.7b): foreign holdings share continued to fall (6.6%; Jan: 8.8%).

- GII (RM1.0b; Jan: RM1.4b): foreign holdings share remained at 8.7%.

● For the equity market, foreign investors remained net sellers for the sixth consecutive month in February

- Foreign outflows moderated slightly (-RM0.2b; Jan: -RM0.3b), amid moderate global risk-off sentiment.

● Overall, the capital market recorded its largest net inflow in six months (RM4.1b; Jan: RM0.2b)

● Bond flows may moderate in March amid renewed Fed hawkishness

- The 10-year US Treasury average yield increased by 13 bps to 3.64% in February, whilst the 10-year MGS average yield fell 6 bps to 3.81%, narrowing the average yield spread further to 17 bps (Jan: 35 bps).

- Foreign demand for domestic bonds may face headwinds in March as investors turn risk-averse in response to the possible return of hawkish Fed policy; this has been fuelled by astonishingly robust US jobs data and persistently elevated inflationary pressures. This has also been exacerbated by Jerome Powell's recent remarks suggesting a larger 50 bps rate hike remained on the table, depending on the strength of upcoming economic data. Although a more stable recovery in Malaysia’s foreign inflows could emerge in 2Q23, this outcome remains highly dependent on a marked slowdown in US inflation and jobs growth, as well as the Fed signalling the end of its tightening cycle.

- BNM is expected to keep the overnight policy rate at 2.75% after today's Monetary Policy Committee meeting and for the rest of 2023, given slower domestic inflation and an uncertain global economic outlook.

Source: Kenanga Research - 9 Mar 2023

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