Posted Date: July 22, 2020

In June, foreign bond holdings expanded by RM11.6 billion (May: RM1.5 billion) to RM198.9 billion on the back of the highest recorded net foreign inflows since May 2014 (RM13.5 billion). Consequently, the total foreign share of outstanding local bonds as of end-June stood higher at 12.8% (May: 12.2%).

Most of the foreign inflows (67.2%) had gone into Malaysian Government Securities (MGS). As a result, foreign MGS holdings rose to RM156.9 billion (May: RM149.1 billion), or 37.3% of the total outstanding (May: 35.9%). The inflows were mostly concentrated on the front end to the belly of the yield curve given the relatively larger narrowing of the positive MGS/UST yield differentials along the 1y10y curve.

Global accommodative monetary policy, together with Malaysia's subdued inflation outlook, had fuelled the foreign demand. Despite international agencies' recent downgrade of Malaysia's economic and rating outlook, foreign investors had continued to add local bonds to their portfolios. This is not surprising given that the 10y MGS, compared to its ASEAN bond counterparts of similar international rating bands and below, offered the highest real yield YTD.
MGS yields had initially surged during the first week of June after the additional RM10.0 billion of economic stimulus measures fed into concerns of a wider fiscal deficit and higher debt in 2020. However, the yields began pulling back in the following weeks as bargain-hunting activities ensued. MGS also gained from the slew of disappointing domestic economic data releases in the final week of June, which eventually led to the 25bps cut in the Overnight Policy Rate on July 7 to 1.75%.

Despite the pullback, MGS yields remained broadly higher as of end-June vis-à-vis end-May by 5bps to 19bps along the 7y20y curve. Nevertheless, the MGS market remains resilient as yields were still lower compared to their peak levels in March. It is noteworthy that at the time of writing, the 10y MGS was last quoted at a historical low of 2.63%.

Tan Jack Fong, +603-2717 2958/ jackfong@marc.com.my;
Ummi Kalsom Yaacub, +603-2717 2934/ ummikalsom@marc.com.my;
Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my.