Return of foreign buyers a positive for the economy as risk aversion declines in emerging markets

By Lee Min Keong

After a tepid last two months, foreign buyers returned to the Malaysian bond market in June, mopping up RM11.6 bil in domestic bond securities, resulting in the biggest monthly net foreign inflow since March 2016, according to RAM Rating Services Bhd (RAM Ratings).

The return of foreign interest reflects declining risk aversion towards emerging markets due to stabilising oil prices and a resumption in economic activities as lockdowns ease in this region. 

Increased global liquidity amid central banks’ quantitative easing measures may have also encouraged more foreign inflows. 

Yields, however, remained elevated in the first half of June reflecting supply risks arising from the sharp uptick of Malaysia’s projected fiscal deficit after the latest round of additional stimulus programmes that will be funded domestically. 

Risk premiums trend higher

RAM Ratings said concern over the implications of a greater supply of government issues this year pushed the 10-year Malaysian Government Securities (MGS) yield up to a peak of 3.12% on 9 June (end-May: 2.87%). 

Investors may also have demanded a risk premium due to the IMF’s bleaker global growth projection and the revision of S&P Global Ratings’ outlook on Malaysia’s sovereign rating, from stable to negative in June. 

Yields began to gradually retreat towards the second half of June, as the possibility of another Overnight Policy Rate (OPR) cut at the monetary policy committee (MPC) meeting on 7 July loomed. 

As the 25bps cut materialised, lowering OPR to a record low of 1.75%, bond yields nosedived across the maturity spectrum in early July. This saw the benchmark 10-year MGS yield falling 20.8 bps between end-June and 16 July. 

The prospect of further monetary loosening is envisaged to keep a lid on yields in the near term. Looking ahead, RAM expects another 25bps cut with the OPR possibly ending the year at 1.5%.

Asian bonds see highest foreign buying in a year 

Meanwhile, this trend of foreign inflows was also evident in the Asian bond market. Asian bonds recorded their biggest foreign inflows in a year in June as a surge in global liquidity following stimulus measures by major central banks bolstered demand for regional assets. 

Asian bonds received a combined net inflow of US$6.45 bil (RM27.5 bil) last month, the highest since June 2019, data from regional banks and bond market associations in Indonesia, Malaysia, Thailand, South Korea and India showed, according to a Reuters report.

Foreign investors bought US$2.87 bil worth of South Korean bonds, the highest in the region. The country’s bonds have attracted inflows every month this year. 

South Korea’s stronger current account position, lower fiscal deficit and better yields, compared to other countries with the same sovereign ratings, are said to be the reasons behind inflows into its bonds. 

Malaysian bonds also received US$2.7 bil worth of foreign money last month, largely into Malaysian government securities. 

At the end of last month, ratings agency S&P Global changed to negative its outlook on Malaysia, to reflect weaker fiscal metrics, growth outlook, and heightened policy uncertainty.