Foreign sell-off moderates, fund outflows to abate in Q3: Kenanga

PETALING JAYA: Foreign net sell-off 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, according to Kenanga Research.

In its report yesterday, Kenanga said the outflow lowered foreign holdings share in the country’s debt securities to the lowest in eight years at 13.7% or since June 2010.

The research firm said the total outflow summed up to RM24.2 billion in the second quarter of 2018, eroding the RM3.4 billion inflows into the debt market in the first quarter of the year.

Year-to-date, the total outflow from the Malaysian debt market summed up to RM20.8 billion, it noted.

“Investors’ exodus from the domestic debt market extended to June as negative news flow emerge on Malaysia’s debt level, sparking concerns of the government’s ability to finance its debt level. Hence, creating a higher risk premium for the holding of Malaysian government debt,” it added.

On the external front, Kenanga said the US Federal Reserve’s tightening move triggered bond traders to move away from the emerging market as a whole.

It also noted that June’s sell-off was attributable to a total of RM6.7 billion outflow from long-dated securities, which reduced the foreign holdings share of longdated securities (MGS+GII) to 24.7% in June or the lowest since May 2011.

Consequently, the average local benchmark 10-year MGS bond yield rose further to 4.21% in June, widening the gap with the benchmark 10-year Treasury yield to 130 basis points from 120 basis points in May.

Meanwhile, Kenanga said the short-dated securities registered a marginal inflow of RM0.08 billion in June, raising the foreign holdings share of short-dated securities to 56.9% from 53.9% in May.

The research firm said the preference of short-dated securities reinforces its view that foreign investors sell-off during the month is primarily due to renewed concerns of Malaysia’s debt level and the government’s ability to refinance its debt.

It said with a total of RM21 billion conventional and RM16 billion sukuk bonds due for maturity in the third quarter of this year, the sell-off from the bond market is expected to persist in the coming quarter.

Moreover, Kenanga said the recent US tariffs on China’s imports has also created much 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% from 2.86% the preceding week.

“However, the local govvies have also seen its yields falling over the past week, indicating that investors could be on the hunt for high yielding assets including Malaysia’s bonds. Additionally, we expect sentiments to gradually improve.

“Firstly, we see more certainty on the timing of Fed’s rate hike following its June meeting. Secondly, with the completion of the Pakatan Harapan government’s 100 days in office and introduction of new policies, we expect improvement in sentiments to cap capital outflow.”

“Hence, while we expect capital outflow to persist in the coming quarter, we expect it to be limited. In the interest of ensuring market stability, we expect Bank Negara to leave the overnight policy rate unchanged at 3.25%,” it added.