Bond outflows may prove short-lived after OPR decrease
KUALA LUMPUR: The country's sovereign bond market looks poised to bounce back from recent selling pressure, after a rate cut this week that may fuel bets on further easing.
Bank Negara lowered borrowing costs for the first time in five years on Wednesday, calling it a 'pre-emptive measure' in the face of growing risks for the South-East Asian nation's economy.
The move came after foreign investors sold a net US$676mil last month, following three months of inflows, data from Bank Negara showed.
A shift to easing underscores policymakers' concerns about the fall-out of recent US tariffs on Malaysian goods, which were raised to 25% this week.
That could ramp up the pressure on an economy that had suffered three consecutive quarters of slowing growth by the end of March, suggesting more room for monetary easing – and a rebound in bond demand.
The central bank's 'accompanying dovish assessment of downside growth risks from external factors, such as uncertain US tariff policy, could spur bets of further rate reductions,' said Chua Han Teng, a senior economist at DBS Bank.
This may result in 'returning of foreign portfolio inflows into Malaysia's government debt securities, reversing the temporary outflows in June 2025'.
Still, market watchers will be monitoring whether the outflows persist amid evolving global risk sentiment, US trade policy developments and the uncertainty about Malaysia's growth outlook, said Shier Lee Lim, a foreign-exchange and macro strategist at Convera in Singapore.
'At this stage, the market remains focused on these drivers, and flows could remain sensitive to shifts in the external environment.'
June's bond sell-off was mainly driven by cooling bets on ringgit gains, according to BNP Paribas.
The currency has risen 5% against the dollar this year, partly the result of firms being encouraged by authorities to repatriate overseas income.
Malaysia's bonds still have some appeal, with foreign holdings of the bonds likely 'rising in the medium to longer term,' according to Winson Phoon, head of fixed income research at Malayan Banking Bhd in Singapore.
Value in the short-end appears fair and returns are seen toward the 30-year part of the curve, he added. — Bloomberg
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