KUALA LUMPUR: Foreign investors turned net sellers of Malaysian bonds in June, resulting in a net foreign outflow of RM497.1mil.
This effectively ended a 13-month streak of net foreign inflows, with falling demand observed since May. Shorter-tenured Bank Negara securities and Malaysian Treasury Bills (MTB)/Malaysian Islamic Treasury Bills (MITB) accounted for the bulk of the June sell-off, totalling RM1.2bil.
The downtick was mitigated by a more subdued inflow of RM686.2mil into Malaysian Government Securities(MGS)/Government Investment Issues (GII), less than half of the RM1.7bil recorded in May.
The continued weak foreign appetite may be partly attributed to heightened risk aversion amid rising Covid-19 infections, the extension of full lockdowns, and uncertainties on the economic and political front.
Investors may also be repositioning their portfolios towards the United States to capitalise on growing prospects of faster thanexpected interest rate normalisation.
In view of increased interest in US Treasuries (UST) securities, the 10-year yield spread between MGS and UST securities widened to around 186 basis points (bps) as of early-July, the most since the start of the year.
While still-positive yield differentials favouring MGS/GII should continue to support capital flows in the short-term, a strong recovery in the US could drive investors away from emerging markets that are still struggling with the economic fallout of the pandemic.