PETALING JAYA: Foreign holdings of Malaysian bonds saw a decline in January 2024, shrinking to RM265.3 billion from RM270.4 billion in December 2023, underscoring shifting sentiments in the bond market.
MIDF Research attributed the decline to the depreciating ringgit and net inflows of foreign funds into the equity market.
“Foreign holdings of govvies (government bonds) made up 21.8% or RM252.4b of the total outstanding government bonds in Jan-24, declining from 22.5% in the previous month and well under the pre-pandemic level (2019 average: 23.1%). Overall, the decline in foreign holdings of Malaysian bonds is in line with our expectations given the depreciating ringgit on the back of net inflows of foreign funds into the equity market in Jan-24,” it said.
MIDF Research stated that Malaysian Government Bonds (MGS) tend to follow the same pattern as US Treasury Bonds.
In January 2024, the 10-year MGS yield rose slightly to 3.79%, while the 3-year yield dropped to 3.39%. Throughout the month, the 10-year yield stayed fairly steady, fluctuating between 3.73% and 3.87%.
“The movement of the 10-year MGS yield largely tracked the 10-year UST yield movement but was less volatile. Additionally, Bank Negara Malaysia (BNM) also maintained the OPR at the 3.00% rate, keeping the OPRFFR (overnight policy rate framework and reference rate) differential status quo,” it said.
Trading activity increased to RM80.7 billion from RM55.1 billion in December 2023 as the top 10 traded government bonds made up 48.6% of the total traded government bonds (Nov-23: 50.6%).
“The relatively muted secondary market activity also reflected the larger net new issuance of govvies in Jan-24,” it said.
UOB Global Economics & Markets Research said persisting foreign selling of Malaysian bonds in January marked the largest net selling of bonds in 15 months.
“The market volatility since the start of 2024 continues with the recent strength in US economic data and affirmation from US Federal Reserve chair Jerome Powell that the Fed is not ready to begin rate cuts until policymakers are sure that inflation is headed towards the Fed’s 2% target.
“This has made a rate cut at the March 19/20 FOMC meeting unlikely leading to higher 10-year UST yields at 4.15% (vs 3.88% at end December 2023) and the dollar index (DXY) rising to 104.13 (vs. 101.38 at end-December 2023),” it said.
UOB expects the Federal Reserve to first cut interest rates in June, followed by two more cuts later in the year, totalling a reduction of 0.75 basis points.
Separately, MARC Ratings said rate cut pushback has led to bond sell-off. It stated that the MGS market reacted to the rise in US Treasury yields following investors’ reassessment of the path for the Fed’s interest rate policy amid positive US economic data.
It said that a prominent increase in yields was noted for longer-term Malaysian government bonds.
“Notwithstanding the elevated global interest rate environment, the local bond yields are expected to remain steady amid stable domestic inflation and expectations of BNM unchanged policy rate,” it said.
It was also observed that the local corporate bond market rallied in January 2024, with yields of the high-rated category dropping, particularly at the longer end of the curve.
“The month’s rally in the local corporate bond market suggests positive investor sentiment amid expectations of a firmer domestic economic environment. Consequently, the yield spread between the high-rated corporate bonds and MGS narrowed for the month,” MARC Ratings said.