MARC: Strong foreign bondbuying continues

KUALA LUMPUR: For the eighth consecutive month, the local bond market continued to see net positive foreign inflows in December.

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, commented Malaysian Rating Corporation Bhd (MARC) in a note.

“With net foreign inflows coming in at RM3.6 billion, total foreign holdings rose to RM223 billion, the highest since November 2016,” it saw. “This took the total foreign share of outstanding local bonds to 13.9 per cent.

“Malaysian government securities (MGS) and government investment issues (GII) were the primary drivers of December’s net foreign inflows. Foreign holdings of MGS rose by RM2.4 billion to RM177.3 billion, which is equivalent to 41.1 per cent of total outstanding MGS.

“Meanwhile, foreign holdings of GII increased by RM1.4 billion to RM24.8 billion, representing 6.6 per cent of total outstanding GII.”

MARC saw that foreign demand for MGS in December was mainly driven by yieldhunting 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$900 billion 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.

For the full year 2020, the local bond market accumulated RM18.3 billion of net foreign inflows. Foreign investors had been adding local bonds to their portfolios since May, thanks to a ractive real yield valuations.

The total net foreign inflows were led by MGS (RM13.4 billion), followed by Malaysian treasury bills (+RM3.8 billion) and GII (RM3.7 billion).

“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,” MARC continued.

“MGS yields had spiked in a knee-jerk reaction to the emergency declaration but have since been trending downwards.”

Meanwhile, following Bank Negara Malaysia leaving the OPR unchanged at 1.75 per cent, leading MARC to expect the MGS yield curve to steepen further during 1H2021 with the 10-year yield hovering between 2.60 and 2.80 per cent.

“We expect gross issuance of MGS/GII in 2021 to come in at between RM150 billion and RM160 billion.”