Kenanga: RM6.6b outflow last month

KUALA LUMPUR: Foreign net selloff of Malaysian debt securities extended for the third month in June, totalling RM6.6 billion after May’s staggering sell-off of RM12.9 billion.

Kenanga Investment Bank Bhd said the outflows lowered foreign holdings’ share in Malaysian debt securities to 13.7 per cent, the lowest in eight years.

The investment bank said total outflows added up to RM24.2 billion in the second quarter of this year, eroding the RM3.4 billion inflows into the debt market in the first quarter.

Year-to-date, the outflow from the Malaysian debt market totalled RM20.8 billion, said Kenanga.

Investors’ exodus from the domestic debt market extended to last month as negative news flow emerged on Malaysia’s debt level, sparking concerns of the government’s ability to finance its debts.

According to Kenanga, the concerns had created a higher risk premium for the holding of Malaysian government debt.

The United States Federal Reserve’s (Fed) tightening move had triggered bond traders to move away from emerging markets.

Last month’s sell-off was attributable to RM6.7 billion outflows from long-dated securities, reducing the foreign holdings share of long-dated securities (MGS+GII) to 24.7 per cent for the month or the lowest since May 2011.

“Consequently, the average local benchmark 10-year MGS bond yield rose to 4.21 per cent last month, widening the gap with the benchmark 10-year Treasury yield to 130 basis points from 120 basis points in May.”

Meanwhile, short-dated securities registered a marginal inflow of RM0.08 billion last month, raising foreign holdings share of shortdated securities to 56.9 per cent.

Kenanga said with a total of RM21 billion conventional and RM16 billion sukuk bonds due to mature in the third quarter this year, it expected sell-offs in the bond market will persist in the coming quarter.

The recent US tariffs on China’s imports have also created uncertainty in emerging markets, resulting in a shift of investors’ demand away from emerging markets’ assets to US safe haven assets, driving down the US Treasury yields in the past week to 2.84 per cent from 2.86 per cent in the preceding week.

Regional markets have also seen yields falling in the past week, indicating that investors could be on the hunt for high-yield assets, including Malaysia’s bonds.

The investment bank said it expects improvement in sentiment to cap capital outflows, following the new government’s 100 days in office and the introduction of new policies.

“We expect capital outflows to persist in the coming quarter but will be limited. We also expect Bank Negara Malaysia to leave the Overnight Policy Rate unchanged at 3.25 per cent.”

INFO BOX RM20.8b Foreign net sell-off of Malaysian debt securities year-to-date