Highlights of the report as follow:-
· Foreign selling of local debt may have bottomed out in April with foreign holdings to total local debt rising by RM6.77bil to RM185.0bil which makes up 15.4% of total debt outstanding. We noticed foreign holdings in MGS climbed by RM5.72bil to RM141.6bil in April 2017 to 39.7% of total outstanding MGS holdings, while their exposure to GII fell for the sixth consecutive month to RM20.1bil or 7.92% as a percentage of its total outstanding. Meanwhile, foreign appetite for local corporate bonds remained positive, reflected by the second consecutive month of gains, up 3.0% to RM16.5bil in April which is the highest since December 2016.
· Favourable growth added with the absence of QE tapering by the ECB and BoJ plus a potential rate hike by the US Fed will continue to entice liquidity into the emerging market.
· Malaysia is in the radar screen and a beneficiary. This explains the drop in the 10-year MGS yield in April. The average yield spread of 10-year MGS vis-à-vis UST had widened from 163bps in March compared to 182bps in April. However, in May so far, the spread has dropped to 156bps which is approaching closer to the long-term average spread of 149 bps.
· With markets continuing to price in a June Fed rate hike at 97% chance while ours is now at 90% chance, we expect the appetite for govvies and local papers to remain healthy. Possibilities for the 10-year MGS yields to hover around 3.8500-3.900 in the near term is in our projection, which then translates into room for further narrowing of the spread between 10-year MGS and UST.