Posted Date: August 2, 2022

Foreign investors decreased their local bond holdings in June amid the aggressive rate hikes of 75 bps by the US Federal Reserve (Fed) and global risk-off sentiment. June recorded the highest foreign outflows to date, amounting to RM4.1 billion. Consequently, total foreign holdings shrank further to RM253.3 billion (May: RM257.5 billion). This was mainly driven by Malaysian Government Securities (MGS)/ Government Investment Issues (GII), which logged foreign outflows of RM3.4 billion in June (May: +RM383 million).

Malaysian Treasury Bills (MTB) and corporate bonds also registered foreign outflows of RM1.0 billion (May: +RM543 million) and RM87.7 million (May: +RM76.1 million). Meanwhile, Malaysian Islamic Treasury Bills (MITB) moved in the opposite direction with foreign inflows of RM1.2 billion (May: -RM471 million). The net foreign outflows of RM4.1 billion in June completely offset the cumulative net foreign inflows of RM911 million recorded from January to May 2022. As such, the cumulative foreign flows currently stand in the negative territory at RM3.2 billion, last seen in June 2020.

Total MGS/GII outstanding grew further to RM962.3 billion at end-June from RM947.3 billion at end-May. The increase was primarily driven by higher MGS issuance, which more than doubled to RM10.5 billion (May: RM4.5 billion). Meanwhile, new issuance of GII papers dropped to RM4.5 billion from RM8.0 billion recorded in May. There was no redemption of government bonds for the second consecutive month. In 1H2022, total gross MGS/GII issuance came in higher at RM87.5 billion (1H2021: RM80.5 billion), which is within our projected range of RM170 billion to RM180 billion for the whole of 2022.

In June, domestic sovereign yields largely tracked the movement in US Treasury (UST) yields. MGS was initially under selling pressure amid market expectations of faster interest rate hikes in the US, with the 10y yield soaring to a peak of 4.40% (end-May: 4.19%).Subsequently, the markets reacted more significantly after the Fed delivered a higher-than-expected rate hike at its policy meeting on June 15.

Consequently, MGS yields erased some of their earlier month gains brought about by strong haven demand as concerns piled up that the aggressive monetary tightening in major economies to tame the surging inflation could impede the global economy. At the month’s close, MGS yields were higher by 3 bps to 21 bps along the 3y30y curve. Of note, the 10y MGS yields settled at 4.24%.

The full report can be accessed here.