M’sian bonds may gain from US Fed Reserve’s dovish stance
KUCHING: With the US Federal Reserve appearing to be less committed to raise rates anytime soon amidst growing signs of a weak economy and a dissipating Trump reflation trade, more funds are expected to switch into higher yielding assets and the emerging markets.
This could raise the flow of foreign funds into Malaysian debt securities in the short to medium term, says researchers at Kenanga Investment Bank Bhd (Kenanga Research).
The market was somewhat surprised when the Fed’s tone was more dovish than the market had expected in its latest monetary announcement on July 27. The Fed acknowledged that inflation have been on a moderating trend and expected to remain below its two per cent target.
With low energy prices and weak wage growth, signs of a weakening economy -- along with the dissipating Trump reflation trade -- Kenanga Research saw that markets have started to factor in a higher possibility of a delay in Fed’s rate normalisation schedule.
“Because of this, one of the most notable impacts would be another major shift of funds towards higher yielding assets mainly in the emerging debt markets,” it said in a report earlier this week.
“While the market continues to digest the Fed’s dovish statement, Malaysia’s debt market could see a rebound in net foreign holdings of debt securities from July onwards.
“While the implied probability of a Fed funds rate hike at the FOMC meeting in December has receded, the market would soon turn its focus on the timing of Fed’s first balance sheet normalization, in which the Fed has signaled to be ‘relatively soon’.
“As such, from a longer period perspective, we see minimal impact of Fed’s latest announcement on domestic bonds flows and yield, though it may provide some form of defense for the domestic debt market in terms of funds retention.”
Meanwhile, the benchmark 10- year Malaysia Government Securities (MGS) yield continued to remain stable at 3.988 per cent as of July 28, marginally lower than 3.99 per cent yield registered the day before the Fed latest rate decision.
“Given the lingering risk in the global economy, we expect foreign portfolio inflows to prefer shorter government bond tenures,” the research firm added.
“Cautiously waiting for the Fed’s next course of tightening action, which include the muchanticipated unwinding of its US$ 4.5 trillion balance sheet, could however limit the purchasing upside of ST securities by foreign funds.” At the moment, foreign holdings of Malaysia’s government debt securities experienced a mild outflow in June following two consecutive months of capital inflows.
Foreign net selling of government debt securities was just RM0.4 billion for the month following a net inflow of RM9.9 billion in May. It is noteworthy that the year-to-date (end-June) capital outflows still stood at RM21.9 billion, the largest outflows in recent years.
MGS turned out to be the only government securities that saw net selling by foreign funds in June.
“Total foreign ownership of MGS declined by RM0.9 billion in June. As a result, share of foreign holdings of MGS moderated slightly to 41.2 per cent from 41.8 per cent in May.
“In contrast, foreign holdings of all other government debt instruments saw a stable and positive net increase. Meanwhile, the Malaysian equity market continued to enjoy steady foreign capital inflows in 2Q17 on the back of improved corporate earnings as exports and economic growth rebounded strongly.”