Total outflow amounts RM20.8bil from Malaysian debt market

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

Kenanga Investment Bank Bhd said the outflow lowered foreign holdings’ share in Malaysian debt securities to the lowest in eight years at 13.7 per cent or since June 2010.

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

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

According to a note by Kenanga, the aforementioned concerns have created a higher risk premium for the holding of Malaysian government debt.

The US Federal Reserve’s tightening move had also triggered bond traders move away from the emerging market as a whole.

June’s selloff was attributable to a total of RM6.7 billion outflow 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 further to 4.21 per cent in June, 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 in June raised the foreign holdings share of short-dated securities to 56.9 per cent.

“The preference of short-dated securities reinforces our view that foreign investors selloff during the month is primarily due to renewed concerns of Malaysia’s debt level and the government’s ability to refinance its debt.”

Kenanga said with a total of RM21.0 billion conventional and RM16.0 billion sukuk bonds due for maturity in third quarter 2018, it expected the selloff from the bond market to persist in the coming quarter.

The recent US tariffs on China’s imports has also created much uncertainty in the emerging market, 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 the preceding week.

Regional markets 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.

“We expect sentiments to gradually improve. Firstly, we see more certainty on the timing of Fed’s rate hike following its June meeting.”

The investment bank said it expected improvement in sentiments to cap capital outflow, following the completion of the Pakatan Harapan government’s 100 days in office and introduction of new policies.

“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 per cent.”