Posted Date: October 4, 2021

Foreign investors resumed their net buying activities in August after being net sellers in the previous two months. Foreign inflows into the local bond market in August amounted to RM6.6 billion, offsetting the outflows that occurred in June and July which amounted to RM4.1 billion. Foreign holdings amounted to RM250.4 billion (Jul: RM243.8 billion) with foreign investors holding 14.6% of total outstanding local bonds (Jul: 14.3%).

Foreign inflows were mostly concentrated on Malaysian Government Securities (MGS) and Government Investment Issues (GII). Foreign holdings of MGS rose by RM3.1 billion to RM191.7 billion (Jul: RM188.6 billion), equivalent to 40.3% of total outstanding MGS (Jul: 40.4%). Meanwhile, foreign holdings of GII expanded by RM3.2 billion to RM34.4 billion (Jul: RM31.2 billion), equivalent to 8.6% of total outstanding GII (Jul: 7.8%). Foreign demand for MGS and GII was supported by increased confidence in Malaysia's economy amid the rapid vaccination rates and gradual reopening of economic sectors.

Despite the influx of foreign funds, MGS yields were pushed higher in the secondary market in August. MGS yields were traded higher as trade volume simmered due to local investors staying on the sidelines amid the political uncertainty in Malaysia. MGS yields were also influenced by higher yields in US Treasuries (UST) ahead of the conclusion of the Jackson Hole Forum on 27 August. Investors were worried about the prospect of the announcement of tapering as there were signs of economic growth, albeit at a moderated pace, in the US.

Towards the final few days of the month, MGS yields started to ease slightly amid increased clarity on Malaysia's political front following the instalment of the new prime minister. By end-August, the MGS yield curve was bearishly flattened with both the 10y/3y and 20y/3y spreads narrowing to 87bps and 168bps (Jul: 92bps and 173bps). MGS yields along the 3y7y curve edged higher by 6bps to 9pbs while yields at the longer end were higher by 3bps to 5bps. Yield on the 10y MGS settled 4bps higher at 3.21% (Jul: 3.17%). Meanwhile, the total trade volume of MGS in August fell to RM31.9 billion (Jul: RM42.8 billion).
In contrast, generic corporate bond yields were broadly lower in August that saw their credit spreads narrowing as MGS yields surged. Generic AAA, AA and A-rated corporate bond yields declined by between 1bp to 5bps across the 3y15y curve. Most of the gains were concentrated along the 3y5y curve, causing their yield curves to be steepened. Gains in corporate bonds were supported by the easing of movement restrictions and heightened foreign demand. Meanwhile, trade volume for corporate bonds was slightly higher in August at RM13.3 billion (Jul: RM12.3 billion).
The full report can be accessed here.

Tan Jack Fong, +603-2717 2958/ jackfong@marc.com.my;
Firdaos Rosli, +603-2717 2936/ firdaos@marc.com.my.