Published on 16 Jul 2021.
Foreign investors turned net sellers of Malaysian bonds in June, resulting in a net foreign outflow of RM497.1 mil. This effectively ended a 13-month streak of net foreign inflows, with falling demand observed since May. Shorter-tenured BNM securities and MTB/MITB accounted for the bulk of the June sell-off, totalling RM1.2 bil. The downtick was mitigated by a more subdued inflow of RM686.2 mil into MGS/GII, less than half of the RM1.7 bil recorded in May.
The continued weak foreign appetite may be partly attributed to heightened risk aversion amid rising COVID-19 infections, the extension of full lockdowns, and uncertainties on the economic and political front. Investors may also be repositioning their portfolios towards the US to capitalise on growing prospects of faster than expected interest rate normalisation. In view of increased interest in UST securities, the 10-year yield spread between MGS and UST securities widened to around 186 bps as of early-July, the most since the start of the year. While still-positive yield differentials favouring MGS/GII should continue to support capital flows in the short term, a strong recovery in the US could drive investors away from emerging markets that are still struggling with the economic fallout of the pandemic.
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