Strong foreign bond buying continues


THE local bond market continued to see net positive foreign inflows in December for the eighth consecutive month despite Fitch Ratings Inc’s downgrade of Malaysia’s sovereign credit rating against the pandemic backdrop, and a strong indication that investors were buying into November’s dip.

Malaysian Rating Corp Bhd (MARC), in a research note yesterday, stated that Malaysia’s total foreign holdings rose to RM233 billion, the highest since November 2016.

“With net foreign inflows coming in at RM3.6 billion in December (November: RM2.5 billion), total foreign holdings rose to RM223 billion, the highest since November 2016. This took the total foreign share of outstanding local bonds to 13.9% (November: 13.6%),” MARC noted in its statement.

Malaysian Government Securities (MGS) and government investment issues (GII) were the primary drivers of December’s net foreign inflows.

Foreign holdings of MGS rose by RM2.4 billion to RM177.3 billion, which is equivalent to 41.1% of total outstanding MGS. Meanwhile, foreign holdings of GII increased by RM1.4 billion to RM24.8 billion, representing 6.6% of total outstanding GII.

“Foreign demand for MGS in December was mainly driven by yield-hunting activities given that Malaysia had remained in deflationary territory and the US Federal Reserve’s pledge to keep rates near zero at least through 2023,” MARC noted.

Demand for MGS was also supported by the broad weakness of the US dollar against the backdrop of improving global risk sentiment, which was boosted by the fresh US$900 billion (RM3.63 trillion) US fiscal stimulus, the approval of the post-Brexit deal, early vaccine rollouts in both the US and the UK, and soaring crude oil prices.

Amid steady foreign demand, MGS yields ended lower in December across the curve in a bull-flattening move.

Yields along the 7y20y curve were largely lower by nine basis points (bps) to 32bps, while yields at the short end were lower by 3bps to 8bps.

“It is notable though that yields were still broadly higher compared to October. The three-year MGS settled 3bps lower at 1.88% after surging by 15bps in November.

“In the same period, the 10-year MGS settled 9bps lower at 2.65% after rising by 12bps in the previous month,” the report stated.

For the full year of 2020, the local bond market accumulated RM18.3 billion of net foreign inflows.

“Foreign investors have been adding local bonds to their portfolios since May, thanks to attractive real yield valuations.

The total net foreign inflows were led by MGS (+RM13.4 billion), followed by Malaysian Treasury Bills (+RM3.8 billion) and GII (+RM3.7 billion),” said MARC.

Moving into 2021, the recent implementation of another Movement Control Order, or MCO 2.0, and the declaration of a state of emergency will affect sentiment, though a lot will also depend on how developments pan out further down the road.

MGS yields spiked in a knee-jerk reaction to the emergency declaration, but have since been trending downwards.