Published on 18 Dec 2020.
The Malaysian bond market charted its seventh consecutive month of net foreign inflow in November (RM1.9 bil), led by MGS and GII (RM2.7 bil). Sturdy foreign appetite lifted the YTD inflow to RM14.8 bil as at end-November 2020, 25% higher than the corresponding period the previous year. Foreign holdings as a percentage of total bonds outstanding rose to 13.6% - the highest level since January 2020. This was underpinned by improving sentiments and yield hunt amid low global interest rates.
Despite steady foreign demand, yields still rose across the board in November. Investors had likely priced in higher market risk arising from the myriad uncertainties over the US presidential election and domestic political turmoil that had threatened to derail the passing of Budget 2021. Domestic yields may have also faced upward pressure amid tighter market liquidity, as the turnover ratio for MGS/GII averaged at 0.059 in November (10M 2020 average: 0.116) - the lowest since December 2018.
Meanwhile, any reaction following the recent sovereign downgrade by Fitch Ratings on 4 December appears rather muted and short-lived. The yields of 10-year MGS had initially trended slightly upwards at the start of the week but soon reversed to end 2.4 bps lower than the previous week. The USD/RM exchange rate also ended the week stronger at 4.055 on 11 December from 4.064 the week before. Following Fitch Ratings’ downgrade, investors may be more wary of potentially similar rating actions from the other two rating agencies further down the line. Another downside risk stems from FTSE Russell’s evaluation of Malaysia’s watchlist status at its next review in March 2021.
Woon Khai Jhek, CFA
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