Posted Date: July 30, 2021

In June, foreign flows into the local bond market turned negative for the first time in 14 months. Foreign holdings of local bonds fell by RM0.5 billion to RM247.4 billion (May: RM247.9 billion), equivalent to 14.6% (May: 14.7%) of total outstanding local bonds. The outflows were mainly driven by the reduction in foreign holdings of short-term papers such as Malaysian Treasury Bills (MTB) and Bank Negara Monetary Notes (BNMN).

Foreign holdings of MTB declined by RM1.1 billion to RM5.5 billion (May: RM6.6 billion), equivalent to 55.1% of total outstanding MTB (May: 66.4%). Appetite for MTB was sapped by the US Federal Reserve's hawkish shift in its June Federal Open Market Committee meeting, rising inflation in the US and taper tantrum fears. Foreign holdings of BNMN fell by RM1.0 billion to zero amid full redemption and lack of new issuances during the month.

Meanwhile, other local debt papers recorded small foreign inflows in June. Malaysian Islamic Treasury Bills (MITB) attracted the largest inflow (+RM0.9 billion) followed by Malaysian Government Securities (MGS) (+RM0.4 billion), Government Investment Issues (GII) (+RM0.2 billion) and corporate bonds (+RM54.1 million). Foreign holdings of MGS amounted to RM192.1 billion (May: RM191.7 billion), equivalent to 40.4% of total outstanding MGS (May: 41.1%).

The MGS yield curve steepened in June as yields along the 1y5y fell while yields at the longer end were broadly higher. Short-term MGS yields fell as local risk-off sentiment continued to worsen. Domestic COVID-19 cases continued to soar despite the extension of the nationwide lockdown. This led to heightened expectations of stricter lockdown measures and a worsened economic outlook.

Towards the end of the month, the government unveiled another RM150.0 billion stimulus package with a direct fiscal injection of RM10.0 billion. The package includes direct cash handouts, subsidies and the RM30.0 billion i-Citra withdrawal scheme from the Employees Provident Fund (EPF). Amid expectations of higher fiscal deficit and waning buying support of MGS from the EPF, long-term MGS yields have surged.

By end-June, MGS yields along the 1y5y curve fell between 5bps to 7bps with the 3y MGS last quoted at 2.26% (May: 2.31%). Meanwhile, yields at the longer end except for the 15y and the 30y rose between 3bps to 5bps. Yield on the 10y MGS rose 5bps to 3.29% (May: 3.24%). Meanwhile, the monthly trade volume ballooned to RM54.1 billion (May: RM33.3 billion).
Tan Jack Fong, +603-2717 2958/ jackfong@marc.com.my;
Firdaos Rosli, +603-2717 2936/ firdaos@marc.com.my.