Inflow of foreign funds into debt markets surged in June

“Total foreign holdings reached a four-month high (RM198.9bil; May: RM187.3bil), with its share to total outstanding debt increasing to 12.8% (May: 12.2%), ” Kenanga IB Research said.

KUALA LUMPUR: The inflow of foreign funds into Malaysia’s debt securities rose to RM11.6bil in June, the fastest pace in over four years, Kenanga Investment Bank Research said.

In its bond flows report on Wednesday, it said foreign investors were net buyers, reflected in the surge in inflow in June, compared with RM1.5bil in May.

“Total foreign holdings reached a four-month high (RM198.9bil; May: RM187.3bil), with its share to total outstanding debt increasing to 12.8% (May: 12.2%), ” it said.

Kenanga Research attributed it to a recovery optimism following the implementation of the Recovery Movement Control Order (RMCO) on June 10, unveiling of a RM35bil Short-Term Economic Recovery Plan (PENJANA) and a rebound in global oil price (USD40.8/barrel; May: USD32.4).

“The month's inflow was mainly driven by a net increase in holdings of Malaysian Government Securities (MGS), Malaysian Government Investment Issues (GII) and Malaysian Islamic Treasury Bills (MITB), ” it said.

For MGS (June: RM7.8bil; May: RM1.9ilb). Foreign holdings share of total MGS picked up to 37.3% (May: 35.9%), a four-month high.

GII (June: RM2.4bil; May: -RM500mil): foreign holdings rose to match a five-month high (June: 5.8%; May: 5.2%).

MITB (June: RM1.1bil; May: RM100mil): foreign holdings edged up to its highest in two months (June: 12.3%; May: 7.1%).

However, it was a contrast when compared with the equities market, where foreign fund outflows extended for twelve consecutive months in June.

Kenanga Research said investors continued to offload funds, albeit at a softer pace in June (-RM3bil; May: -RM3.5bil), on fears over a second wave of Covid-19 infections and following the Fed’s sombre economic outlook.

“Overall, the capital market charted a positive turnaround, with the net inflow in foreign funds (RM8.6bil; May: -RM2bil) matching the largest scale observed in the past 34 months.

“Debt market to absorb further inflow in the near term as economic reopening progresses across the globe, ” it said.

Kenanga Research said the US 10-year Treasury average yield inched up by eight basis points (bps) to 0.73% in June on economic recovery optimism, while the 10-year MGS average yield edged up by 7 bps to 2.91% on domestic political uncertainty, resulting in a narrowed average yield spread of 217 bps (May: 219 bps).

“The inflow, induced by favourable Covid-19 developments domestically and smooth implementation of the RMCO, will however be limited by oil price volatility, elevated geopolitical tension between major economies (e.g. US-China-Hong Kong), fears over a second wave of COVID-19 infections, and worsening domestic political tussle. As such, we maintain our USD-MYR forecastat 4.30 by year-end (2019: 4.09), ” it said.

As for the interest rates outlook, Kenanga Research said the Bank Negara Malaysia, after slashing the Overnight Policy Rate by 25 bps to 1.75% on Tuesday, is expected to embark on further monetary easing.

Another 25bps cut will bring the OPR to a fresh record low of 1.50% in September.

The research house said this was signalled by Bank Negara’s dovish monetary policy statement, which highlighted concerns on the pace of recovery amid a broad-based slump in the labour market and hampered confidence level.

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