MARC: Net foreign inflow into Malaysian bonds at RM18.3b in 2020

MARC said foreign investors had been adding local bonds to their portfolios since May.

KUALA LUMPUR: Malaysia’s bond market attracted RM18.30bil of net foreign inflows for 2020 due to the attractive real yield valuations, according to Malaysian Rating Corporation (MARC).

In its statement on Thursday, it said foreign investors had been adding local bonds to their portfolios since May. The total net foreign inflows were led by Malaysian Government Securities (MGS) (+RM13.4bil), followed by Malaysian Treasury Bills (+RM3.8bil) and Government Investment Issues (GII) (+RM3.7bil).

“In December, net foreign inflows were RM3.6bil (November: RM2.5bil), total foreign holdings rose to RM223bil, the highest since November 2016.

“This took the total foreign share of outstanding local bonds to 13.9% (November: 13.6%), ” it said On the net inflow in December, MARC said this was despite the Fitch downgrade of Malaysia’s sovereign credit rating against the pandemic backdrop, and a strong indication that investors were buying into November’s dip.

In December, MGS and GII were the primary drivers of the month’s net foreign inflows.

Foreign holdings of MGS rose by RM2.4bil to RM177.3bil, which is equivalent to 41.1% of total outstanding MGS.

Meanwhile, foreign holdings of GII increased by RM1.4bil to RM24.8bil, representing 6.6% of total outstanding GII.

MARC said 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.

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$900bil US fiscal stimulus, the approval of the post-Brexit deal, early vaccine rollouts in both the US and the UK, as well as soaring crude oil prices.

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

Yields along the 7y20y curve were largely lower by 9bps 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 3y MGS settled 3bps lower at 1.88% after surging by 15bps in November. In the same period, the 10y MGS settled 9bps lower at 2.65% after rising by 12bps in the previous month, ” it said.

“Moving into 2021, the recent implementation of another Movement Control Order, MCO 2.0 as well as 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 had spiked in a knee-jerk reaction to the emergency declaration but have since been trending downwards, ” it said.

On Thursday, Bank Negara Malaysia (BNM) left the Overnight Policy Rate (OPR) unchanged at 1.75% at conclusion of its January Monetary Policy Committee meeting.

Bank Negara viewed the current OPR level as appropriate and accommodative.

“Given this and the heavier supply of MGS/GII expected this year to support the government’s fiscal initiatives, we expect the MGS yield curve to steepen further during 1H2021 with the 10y yield hovering between 2.60% and 2.80%.

“We expect gross issuance of MGS/GII in 2021 to come in at between RM150bil and RM160bil, ” it said.

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