• Foreign investors net bought local bonds for third consecutive month in May (RM5.5b; Apr:RM0.6b)
  
  − Consequently, total foreign debt holdings rose to RM271.9b (Apr: RM266.4b) in May, with its share of totaloutstanding debt increasing to 13.2% (Apr: 13.0%), afive-month high.
  
  − A combination of robust Malaysian macroeconomicdata and weakness in key US indicators has drawninvestors to redirect their funds into the Malaysian debtmarket in May. Notably, on May 7 and 8, investors netbought RM2.3b in bonds following the release of weakUS jobs report and ISM services figure. To add, on May17, lower-than-expected US inflation figures and weakretail sales led to single-day inflows of RM0.9b. Alsocontributing to these inflows were strong domestic IPIdata, alongside waning US consumer sentiment.

• May’s substantial inflows were driven by funds flowing into Malaysian Government Securities (MGS), Government Investment Issues (GII) and Malaysian Islamic Treasury Bills (MITB)
  
  − MGS (RM3.3b; Apr: RM1.1b): recorded the highest inflows in six months, led by a decrease in US bond yields.However, the foreign holdings share remained at 32.8% (Apr: 32.8%), influenced by the new issuance andreopening of MGS, totalling up to RM10.0b.
  
  − GII (RM1.0b; Apr: RM0.1b): increased significantly, with foreign holdings share rising to 9.1% (Apr: 8.8%).
  
  − MITB (RM0.7b; Apr: -RM0.2b): turned to an inflow, resulting in a sharp increase of the foreign holdings share (9.2%;Apr: 3.2%).

• Foreign investors turned net buyers of Bursa Malaysia in May (RM1.5b), reversing April’s (-RM1.4b) outflows
  
  − Notably, on the first week of May, a significant foreign inflow of RM1.1b was recorded, mainly propelled byinvestments in the utilities sector. While inflows persisted for most of the month, buoyed by domestic economicoptimism and positive movement in US stocks, foreign buying activity on the local bourse reversed in the final weekof May, resulting in a substantial outflow of RM1.2b.

• The capital market recorded net foreign inflows of RM7.0b (Apr: -RM0.8b), its highest level since July 2023
• Domestic debt market well-positioned as major central banks start cutting rates
  
  − Despite recent rate cuts by G10 central banks, we expect the Fed to hold its current rate for the next few months,with a potential reduction as early as September. This move would likely follow stronger evidence of a weakeninglabour market and diminishing inflationary pressures. With interest rates expected to stay elevated for at least thenext quarter, investors are likely to continue buying US Treasuries, particularly short-term bonds, amid heightenedmarket volatility.
  
  − In emerging markets, limited policy stimulus from China may steer investors towards debt over equity. Malaysiastands to benefit from this shift, offering relatively attractive value and quality. The potential for ringgit appreciationfrom its current level further enhances investor returns. With BNM maintaining the overnight policy rate at 3.00%potentially until the end of 2025, and coupled with the government's fiscal consolidation efforts, the domestic bondmarket is well-positioned to attract significant inflows.

Source: Kenanga Research - 12 Jun 2024