UOB: Foreigners snap up Malaysian bonds at the start of 2021

Despite domestic challenges, govt bonds remain attractive as capital flows into EMs remain strong


MALAYSIA’S bond market continued to record higher foreign portfolio inflows at the start of 2021.

UOB Global Economics and Markets Research senior economist Julia Goh and economist Loke Siew Ting noted, despite domestic challenges, Malaysian government bonds remain attractive as capital flows into emerging markets (EMs) remain strong given low global interest rates and high market liquidity that boosts positive carry-trades.

“Overall net foreign inflows totalled RM2.8 billion in January (December: +RM3 billion) with bond inflows of RM3.7 billion (December: +RM3.6 billion), while equities saw net outflow of RM800 million (December: -RM600 million),” Goh and Loke noted in a research report yesterday.

Some of the key domestic events that determined fund movement include the spike in Covid-19 infections that led to the reinstatement of Movement Control Order (MCO 2.0) in mid-January and declaration of state of emergency (until Aug 1, 2021).

Under MCO 2.0, containment measures including social and work mobility were tightened that included a ban on interstate and inter-district travel.

However, key economic sectors and selected non-essential services are allowed to operate.

Foreigners bought Malaysian Government Securities (MGS) worth RM2.3 billion (or about 61% of total RM3.7 billion debt inflows) last month (December: +RM2.4 billion).

This was followed by Government Investment Issues (GII, January: +RM900 million; December: +RM1.4 billion), Malaysian Treasury Bills (January: +RM400 million; December: -RM100 million) and private debt securities including private sukuk (January: +RM200 million; December: -RM600 million).

Foreign holdings of MGS and GII remained at the highest level in more than four years, at RM205.3 billion or 24.2% of total government bonds outstanding as at January (December: RM202.1 billion or 24.2%).

For MGS alone, foreign investors holdings were RM179.6 billion, which is equivalent to 40.5% of total MGS outstanding (December: RM177.3 billion or 40.6%),” UOB noted.

For GII, overseas investors owned RM25.7 billion, which is equivalent to 6.8% of total GII out-standing in January (December:

RM24.8 billion or 6.6%), they added. However, UOB noted that foreigners remained net sellers of Malaysian equities, leaving their ownership of Malaysian equities at a record low of 20.7% of total market capitalisation in January (December 2020: 20.7%; January 2020: 22.4%).

Bank Negara Malaysia’s (BNM) foreign reserves edged up for the third straight month by US$1 billion (RM4.1 billion) month-on-month (MoM) to a 33-month high of US$108.6 billion as at end-January (end-December: +RM2.3 billion MoM to US$107.6 billion).

The latest reserves position is sufficient to finance 8.6 months of retained imports and is 1.2 times total short-term external debt.

“Foreign reserves were supported by portfolio flows into bonds and strong current account position, thanks to healthy merchandise trade surplus,” said Goh and Loke.

While BNM has yet to publish its January 2021 foreign-exchange (forex) swaps data, the central bank’s net short position in forex swaps narrowed for the eighth consecutive month by US$600 million MoM to US$5.8 billion as at end-December 2020 (end-November 2020: -US$500 million to US$6.4 billion).

It is equivalent to 5.4% of total foreign reserves (November: 6.1%), the lowest level since November 2016.

“Despite domestic challenges, we think Malaysia’s government bonds remain attractive as capital flows into EMs remain strong given low global interest rates and high market liquidity that boosts positive carry-trades. To watch are release of Malaysia’s fourth-quarter (4Q) and 2020 GDP on Feb 11, BNM’s monetary policy meeting (March 4), release of BNM Annual Report 2020 (end-March) and yesterday’s FTSE Russell’s March WGBI review,” both economists added.

Malaysia will start the Phase 1 of its vaccine programme by end-February (for frontliners), Phase 2 in April (for high-risk groups) and Phase 3 in May (for aged 18 and above) are some of the key events to look out for this year that will further determine fund movement.