PETALING JAYA: Foreign investors’ buying of Malaysian bonds in August is likely to be temporary due to much more aggressive rate hikes by the U.S. Federal Open Market Committee compared to the raised overnight rate (OPR) by Bank Negara.
The local bond market is expected to see net selling supported by foreign funds seeking higher yields on US dollar bonds before becoming net buyers possibly in the latter part of the fourth quarter of 2022 (4Q22).
Kenanga Research noted that foreign bond investors became net buyers of local bonds worth RM5.6 billion in August after three months of strong selling.
“Bond inflows likely returned on improving global risk sentiment, particularly in early August, as US recession expectations eased and the market began to price in a less aggressive stance. hawkish Federal Reserve (Fed).
“In addition, Malaysia may have benefited from sustained capital outflows from China,” the research firm said in a recent report.
The Fed is expected to raise its key rate by at least 75 basis points tomorrow to 3% to 3.25% from Bank Negara’s current OPR rate of 2.5%.
Malaysian Rating Corp Bhd said that in the first seven months of 2022, cumulative foreign net outflows from the local bond market amounted to RM6.8 billion compared to net inflows of RM20.8 billion during of the corresponding period last year.
Foreign holdings of Malaysian government securities or MGS increased from RM244 billion in July 2021 to RM250 billion in July 2022, according to MIDF Research.
Analysts said the sale of Malaysian debt was linked to aggressive monetary policy tightening by major central banks, with the Fed imposing rate hikes at a faster pace and higher than expected.
“This has been exacerbated by global risk aversion amid fears of a deep recession in Europe and the UK, as well as broader economic downturns in the US, China and the rest of the world. “, Kenanga Research told StarBiz.
“The high inflows of foreign capital seen in August were due to a temporary change in global risk sentiment, as markets began to price in a dovish Fed and price in a US recession.
“However, since Jerome Powell reiterated the Fed’s hawkish stance at the Jackson Hole Symposium, we have seen a sharp return to risk aversion among investors. bond markets improve in 4Q22 with fewer government bond maturities and as the pace of Fed hikes slows,” Kenanga Research said.
iFast Capital’s research director Jason Wong Jia Jun told StarBiz that August’s bond inflows were a good sign, indicating that most of the local bond market selling was over.
“This can be seen as the percentage of Malaysian government debt held by foreigners hit the lowest level since 3Q20.
“In fact, there was a huge net inflow into the local bond market in August as markets began to price in potential US rate cuts in 2023 amid signs that inflation in the United States could subside,” he said.
Last week, Bank Negara raised its OPR by another 25 basis points (bps) to 2.5%. It was the third consecutive 25 basis point rise in OPR this year. While such a move helped stem the sell-off from foreign investors in the bond market to some extent, Kenanga Research said the impact was still small, given the magnitude of the rate hikes implemented.
“This move keeps Malaysia’s policy rate partly in line with its regional peers and developed markets, keeping bond yields high and attractive.
“However, the impact was minimal given the relatively smaller size of the rate hikes. This will likely be even less effective going forward, as the US fed funds rate will overtake the OPR by some distance further. later this month,” he said.
While foreign investors are net short of local bonds, they have been net long in the equity market with nearly RM2 billion in net purchases in August alone.
Kenanga Research said the country’s strong recovery, strong macroeconomic fundamentals and positive yield differentials over developed market bonds still made local bonds relatively attractive in the region.
“If global risk sentiment returns towards the end of the year or early next year, as major central banks begin to slow the pace of rate hikes, then Malaysian bonds are well positioned to attract investors. foreign investors,” he said.