Foreign bond investors’ interest in Malaysian bonds perked up in June (with a net inflow of RM6.6 bil), following two consecutive months of net selling. The renewed demand is mostly attributable to the increasing dovishness of central banks in major global economies amid weaker-than-expected economic data. In line with the downward bias in global interest rates and the subsequent search for yields, domestic bond yields also retreated across the entire maturity spectrum and rating bands in June.
The stronger demand in the secondary market is mirrored by the primary market, as underlined by the robust bid-to-cover (BTC) ratios at government bond auctions last month. Both issues that were up for tendering achieved BTC ratios of above 2 times. Demand for the longer-tenured 20-year GII issue achieved a remarkably strong BTC ratio of 4.28 times while the 5-year MGS charted 2.48 times.
Yields are expected to continue facing downward pressure in July, after investors received yet another clear sign of a looming rate cut from the US Federal Reserve (the Fed) Chairman’s remarks to Congress on 10 July, and another speech at a Paris event to commemorate Bretton Woods the following week. Chairman Powell, during his speech, had reaffirmed the Fed’s concerns about economic prospects and was ready to take appropriate measures to maintain the recovery momentum. These successive signals had prompted the market to start pricing in a potential 50 bps cut, compared to the 25 bps reduction indicated by the fed funds futures market before Powell’s speech.
“There is a multitude of considerations for portfolio investors at this point – whether to pursue yields or seek safety in more conservative assets. As particular factors may dominate at different times, depending on prevailing market developments, volatile capital flows are envisaged to remain a key trend this year,” explains RAM’s head of research, Kristina Fong.