PETALING JAYA: Foreign investors’ purchase of Malaysian bonds in August is likely to be temporary due to the far more aggressive rate hikes by the US Federal Open Market Committee as compared with the overnight policy rate (OPR) raised by Bank Negara.
The local bond market is expected to see sustained net selling by foreign funds looking for higher yields on US-dollar bonds before turning net buyers possibly in the later part of the fourth quarter of 2022 (4Q22).
Kenanga Research noted that foreign bond investors had turned net buyers of RM5.6bil worth of local bonds in August after three months of sustained selling.
“The bond inflows likely returned due to improving global risk sentiment, especially in early August, as US recession expectations eased and the market began to anticipate a less hawkish Federal Reserve (Fed) stance.
“Furthermore, Malaysia may have benefited from sustained capital outflows from China,” the research firm said in a report recently.
The Fed is expected to raise its policy rate by at least 75 basis points tomorrow to 3% to 3.25% as compared to Bank Negara’s current OPR rate of 2.5%.
Malaysian Rating Corp Bhd stated that in the first seven months of 2022, the cumulative foreign net outflows from the local bond market amounted to RM6.8bil as compared to net inflows of RM20.8bil in the corresponding period last year.
Foreign holdings of Malaysian Government Securities or MGS increased from RM244bil in July 2021 to RM250bil in July 2022, according to MIDF Research.
Analysts said the sell-off of Malaysian debt was related to the aggressive monetary policy tightening of major central banks with the Fed imposing rate hikes at a faster and higher-than-expected pace.
“This has been exacerbated by global risk-aversion amid concerns of a deep recession in Europe and the United Kingdom, as well as broader economic slowdowns in the United States, China and the rest of the world,” Kenanga Research told StarBiz.
“The high foreign inflows seen in August are due to a temporary shift in global risk sentiment, as markets began to anticipate a dovish Fed and discounted a US recession.
“However, since Jerome Powell reiterated the Fed’s hawkish stance at the Jackson Hole Symposium, we have observed a distinct return of risk-aversion among investors. Moreover, we still expect bond flows to improve in 4Q22 on fewer government bond maturities and as the pace of Fed hikes ease,” Kenanga Research said.
iFast Capital research manager Jason Wong Jia Jun told StarBiz the bond inflows in August were a good sign, which indicated that most of the sell-off in the local bond market was over.
“This can be seen as the percentage of Malaysian government debt held by foreigners has reached the lowest level since 3Q20.
“In fact, there was a huge net inflow back into the local bond market in August as markets began to price in potential US rate cuts in 2023, amid signs that inflation in the United States could be alleviating,” he said.
Last week, Bank Negara raised its OPR by another 25 basis points (bps) to 2.5%. This was the third consecutive 25-bps OPR hike this year. Though such a move helped to stem the sell-off by foreign investors in the bond market to a certain degree, Kenanga Research stated that the impact was still small, given the size of the rate hikes implemented.
“The move keeps Malaysia’s policy rate partly in line with regional peers and developed markets, thus keeping bond yields high and attractive.
“However, the impact has been minimal given the relatively smaller size of rate hikes. It will likely be even less effective going forward as the US federal funds rate overtakes the OPR by some distance later this month,” it said.
While foreign investors are net short on local bonds, they have been net long in the equity market with almost RM2bil of net buying in August alone.
Kenanga Research said the country’s strong recovery, solid macroeconomic fundamentals and positive yield differentials against developed market bonds still made local bonds relatively attractive in the region.
“If global risk-on sentiment returns towards the end of the year or early next year, as major central banks begin to ease the pace of rate hikes, then Malaysian bonds are well positioned to attract foreign investors,” it said.
