In June, foreign bond holdings expanded by RM11.6bil compared with RM1.5bil in May, the highest recorded net foreign inflows since May 2014.
The total foreign share of outstanding local bonds as of end-June was higher at 12.8% (May: 12.2%) and most of the foreign inflows (67.2%) had gone into Malaysian Government Securities (MGS).
Analysts and economists are upbeat the inflows would continue for the remainder of the year.
Increased global liquidity, low global interest rates and additional fiscal-monetary policies from advanced economies would result in foreign inflows into the local bond market.
Maybank Kim Eng head of fixed income research Winson Phoon (pic below) told StarBiz that on the whole, he expected net foreign inflows into the bond market in the second half of the year.
“From a macro point of view, bond flow is largely a function of risk sentiment. In a yield-starved environment, where the sovereign yields are negative in Japan and the eurozone, and sub -1% for US treasuries due to the massive quantitative easing (QE), the high yielding appeal of emerging Asian bonds, including Malaysia, should continue to attract inflows if the global risk sentiment remains conducive.
“Another point to consider is index-driven flows. Our view is for FTSE Russell to retain Malaysia in the World Government Bond Index (WGBI) at the annual review in September, ” he noted.
Currently, Malaysia remains under FTSE’s watch list for potential exclusion in the WGBI. However, Bank Negara’s measure to improve the onshore bond liquidity is seen as a positive move for its retention in the index.
In April last year, FTSE Russell said it would review the Malaysian government bonds’ participation in the WGBI due to market liquidity issues.
Another index to watch for, Phoon said, is the GBI-Emerging Market Global Diversified index, which has increased Malaysia’s weight in the past nine months. There could be additional inflows if Malaysia’s weight rises further, ” he added.
RAM Rating Services senior economist Woon Khai Jhek (pic below) said that with risk aversion towards emerging markets gradually subsiding while global investment sentiment improves, foreign net inflows for the second half may continue.
Increased global liquidity amid central banks’ QE measures would have also encouraged more foreign inflows. With the US Federal Reserve maintaining its dovish outlook, while also indicating that the policy rate would stay near zero through 2022, the prospects of prolonged low interest rate environment would spark more yield hunting among global investors, he said.
“This, in turn, will generate more inflow into the EM bonds such as Malaysia.That said, substantial risks remain given the uncertainty brought about by the Covid-19 pandemic, which may reverse the current trend of foreign inflows.
“Specifically, the risks of subsequent waves of infections globally could put foreign investors back on the sidelines as risk aversion prevails, ”Woon said.
Commenting on the possible risks, Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias (pic below) noted that a second wave of the pandemic could disrupt global growth recovery as global governments may be forced to renew their nationwide lockdowns.
“This would lead to fresh risk-off sentiment in global financial markets, causing foreign investors to flee towards safe-haven assets. In addition, the recent deterioration in US-China relations could also diminish the strength of global economic recovery efforts, ” he said.
As for bond yields, Zahidi said while there are fears of a second wave of the pandemic and a deterioration in global trade relations which may sap foreign demand for MGS, he does not foresee any potential significant yield spikes in MGS for the second half.
“Supportive fiscal and monetary policies employed in Malaysia would continue to encourage local holdings as witnessed in the first half of the year.
“Combined with the 25 basis points (bps) cut in the OPR to 1.75% on July 7, these domestic factors will keep a lid on yields. For the second half, we envisage the 10-year MGS yield to hover in the range of 2.6% to 2.85%, ” he noted.
On the outlook of the bond market, Phoon said there would likely be a strong year for the ringgit government bonds.
The total return for such bonds is 6.5% year-to-date. If the yield curve stays where it is, adding coupon accruals for the rest of the year, then the total return for 2020 can exceed 8%, a strong year considering the average return per year is usually 4%, he said.
“We expect a “dovish hold” by Bank Negara in September. But if the central bank cuts rate by another 25bps, the total return this year could match that of 2019 (9.1%) for government bonds, ” Phoon said.
Meanwhile, Woon noted that the rating agency projects a higher MGS/GII issuance of RM155bil-RM165bil this year compared with RM115.7bil last year. This is due to the wider budget deficit from increased development expenditure following the stimulus packages announced by the government.
RAM projects corporate bond issuance for 2020 to come in at RM80bil-RM95bil, a deceleration from the RM132.8bil the previous year.
The dimmer issuance outlook is primarily due to the widely expected economic contraction and potential project delays as well as reduced capital expenditure by companies this year.