Foreign inflows into bonds fail to excite

  • Business
  • Monday, 19 Nov 2018

PETALING JAYA: Although foreign holdings of Malaysian government bonds, known as govvies, saw a surge in October for the first time in three months, it does not seem to excite bond analysts and economists.

Many are neutral on the outlook for foreign flows into the local debt market for the rest of this year due to external headwinds like the US Fed’s aggressive stance on rate hikes, strengthening of the greenback, the continuing US-China trade war and falling global oil prices.

The latest data by Malaysian Rating Corp Bhd (MARC) showed foreign ownership of local govvies rose by RM5.4bil to RM172.7bil despite October’s weaker secondary local govvies market.

The increase was largely due to the significant rise in foreign ownership of Malaysian Government Securities (MGS), which saw inflows of RM4.7bil compared with outflows of RM5.6bil in September.

As of end-October, total foreign holdings of MGS stood at RM153bil, equivalent to 40.7% of the total outstanding. Foreign holdings of Government Investment Issues (GII) and treasury bills also registered positive foreign flows.

Overall, foreign ownership of total outstanding local govvies came in 0.9 percentage point higher at 25.5% as of end-October.

MARC sees this increase in foreign holdings as indicative of positive foreign investor sentiment.

Maybank Kim Eng head of fixed income research Winson Phoon told StarBiz that the investment bank was neutral on the outlook for foreign inflows for the rest of the year.

“The amount of foreign inflows in October was surprisingly large, probably due to an improved sentiment in emerging market debts and potentially other factors. Indonesia, which is generally seen as the bellwether of regional flows, has started to see the return of foreign demand. Our outlook on foreign flows is neutral for the rest of the year,” he said.

Domestic demand, he added, for ringgit bonds remained resilient as evident from a relatively stable MGS curve despite consecutive months of foreign outflows prior to October.

Long-dated bonds should continue to receive support as the steepness of the curve still offer good pickup for duration extension, Phoon noted.

Concurring with Phoon, AmBank Group chief economist Anthony Dass said he was taking a neutral stance on foreign inflows in spite of an increase in foreign holdings of govvies last month.

Besides the US Fed rate hike aggressiveness, strengthening of US dollar and US-China trade war, falling global oil prices are expected to hurt emerging markets (EM) as they would continue to struggle to afford crude oil since it is sold in the US currency which is relatively stronger than the EM weaker currencies.

“It suggests they will not get the crude oil price discount which the US is getting. If the oil price continues to fall, the domestic focus will be on the fiscal deficit position that has prolonged after including some hidden skeletons,’’ he said.

However, Dass said investors appetite is more likely to lean on the government papers which are more on the short-term compared to long-term papers as there is a need to manage forex risk against interest rate risk.

CIMB Investment Bank Bhd group head of treasury and markets Chu Kok Wei, however, is of the view that irrespective of the duration of the government bonds, there ought to be little discernible preference from investors in their holdings of the debt papers for the rest of the year.

“For example, life insurers and pension funds will maintain demand for long-term bonds while asset managers may favour short duration.

“In any case, composition of duration is a function of many years of supply-demand balancing between the government as issuer and market players,” he said.

On his take on bond yields for this month and next, Chu said: “MGS yields have creeped up slowly over the last two weeks. We expect bond yields to move in tandem with the MGS yields.

“Market movement is mainly seen to be caused by the impending higher supply of MGS/GII (Government Investment Issue) post the deficit announced during the budget,” he said.

Dass noted that with higher supply of govvies and risk averse environment, yields are more likely to move upwards. “Besides, there are some concerns following the recent move by Moody’s to place Petronas’s to negative from stable as they fear Petronas could be asked to maintain high dividend, especially if oil price continues to fall.

“However, we expect the macro fundamentals to remain healthy supported by domestic demand, favourable domestic liquidity and lower PDS issuance.

“We expect the 10-year MGS at 4.15-4.20% by end-2018 and project the 3-year MGS at 3.67-72% and 5-year MGS at 3.85-90% by year-end,’’ he said.

Phoon was maintaining the 10-year MGS yield at 4.10% by year-end.

“There could be near term weakness due to additional supply of MGS following the announcement of wider budget deficit, ongoing risks surrounding Malaysia’s rating outlook and seasonally thinner liquidity as we near year-end. But we expect strong buying interest from domestic investors if there is a 10-20 basis points steepening in the curve,’’ he said.

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