Local bonds remained attractive to foreign investors given, among other things, the central bank's accommodative monetary policies as well as Malaysia's negative inflationary environment. The ongoing bond purchasing programmes of global central banks had also helped support foreign demand.

Consumer prices, as indicated by the Consumer Price Index (CPI), have been falling y-o-y since March, though the momentum of the fall seems to have weakened. In July, the CPI came in at -1.3%, compared with -1.9% in June. The downward pressure on consumer prices will, however, likely persist at least over the short term given that Malaysia's Producer Price Index (PPI) has also been falling y-o-y since March. In July, PPI fell 3.5%, compared with a decline of 4.0% in the previous month.

There were net foreign inflows into Malaysian Government Securities (MGS), Malaysian Islamic Treasury Bills (MITB) and Islamic corporate sukuk on one hand, and net foreign outflows from corporate bonds, Malaysian Treasury Bills (MTB) and Government Investment Issues (GII) on the other hand. MGS contributed most of the inflows. Consequently, the total foreign holdings of MGS rose by RM3.2 billion (July: +RM7.7 billion) to RM167.8 billion, equivalent to 39.2% (July: 38.2%) of its total outstanding.

The bulk of foreign demand for MGS was mostly concentrated along the short-end of the curve. This was due to heightened expectations of an Overnight Policy Rate (OPR) cut by Bank Negara Malaysia (BNM) in September. However, amid signs of improvement on both the external and domestic economic fronts as business activities resume, BNM had left the OPR untouched at 1.75%.

Year-to-date, net foreign inflows amounted to RM4.3 billion (Jan-Aug 2019: +RM3.4 billion), the highest since 2016. Cumulative net foreign inflows into local bonds were highest in MGS (+RM3.9 billion), followed by MTB (+RM2.0 billion), MITB (+RM0.8 billion) and corporate sukuk (+RM0.6 billion). Meanwhile, there were cumulative net foreign outflows from corporate bonds (-RM1.3 billion), Bank Negara Malaysia Notes (-RM1.0 billion) and GIIs (-RM0.6 billion).

We see the record level of fiscal stimulus, unprecedented monetary easing and negative inflation to continue supporting foreign demand for local govvies in Malaysia going forward. On the supply side, we expect the increase in the government's debt ceiling to 60% of GDP to keep the supply of local govvies elevated over the next two years on pandemic-related stimulus spending.

Contacts:
Tan Jack Fong, +603-2717 2958/ jackfong@marc.com.my;
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my.