Aggressive US rate hikes dampened demand for EM bonds

Published on 25 Aug 2022.

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Rising risk aversion over a potential global economic slowdown amid aggressive rate hikes in the US and Europe continued to dampen foreign appetite for emerging market bonds. Foreign investors remained net sellers of MGS and GII (-RM4.7 bil) and corporate bonds (-RM187.1 mil) in July. Total net outflow was RM3.5 bil (June: RM4.1 bil), tempered in part by sustained inflows into short-tenured govvies (+RM1.3 bil).

The yield curve flattened in July as long-term yields fell. The 10-year MGS yield declined 35.9 bps m-o-m to 3.90%, tracking the 10-year UST yield’s 31.0 bps m-o-m fall to 2.67% as of end-July. The price rally appears to have tapered in August as MGS and UST yields climbed to 3.98% and 3.05%, respectively, as of 23 August. Looking ahead, investors may be expecting the quantum of any further rate hike to ease as policy starts to work its way through the economy. This may result in a milder pace of increase in yields.

 

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