PETALING JAYA – Foreign ownership of Malaysian Government bonds which shrank in September, the first time in 12 months, could see capital outflows continuing in anticipation of a cut in the overnight policy rate (OPR) and a hike in Federal Reserve (Fed) rate after a record high in foreign holdings in August.

Fixed income analysts contacted by StarBiz said there could be outflows until a clearer picture emerges on whether there could be an OPR hike next month or Fed rate hike by year-end.

Areca Capital Sdn Bhd chief investment officer for fixed income Edward Iskandar Toh said: “I do expect some repatriation of capital from foreigners with the US dollar gaining strength and a strong likelihood of a US rate hike by year-end, as well as the risk-off mode to surface again.

“Mitigating this could be the return of the correlation of rising oil prices and the value of the ringgit as well as foreign inflows, which for now have been abandoned.

“I guess we will see a stronger return of foreign funds if there is less focus on 1Malaysia Development Bhd, post-US rate hike and a realisation of a subdued global growth supported by extremely easy global monetary policies,” he added.

The ringgit closed at 4.2125 per dollar yesterday.

Bloomberg yesterday reported that foreign ownership of Malaysian Government bonds dropped in September for the first time in 12 months, with the outflows likely to have been triggered largely by debt maturities.

Overseas holdings decreased 2.6% to RM208.3bil (US$49.6bil), after climbing to a record in August, the wire agency said quoting the central bank data released yesterday.

Sovereign notes worth RM9.7bil matured last month, according to Maybank Investment Bank Bhd (Maybank IB). It cited Maybank IB fixed-income analyst Winson Phoon as saying that the decline in foreign holdings was primarily maturity-driven.

Phoon noted that the outlook was neutral “with a cautious tone for foreign demand” due to external uncertainties such as the United States presidential election, talk of the tapering of asset purchases by the European Central Bank and a potential Fed interest rate increase.

Foreign ownership of Malaysian sovereign and corporate bonds and bills dropped 3.4% to RM238.5bil in September, the first decline in four months, according to central bank data quoted by Bloomberg.

Meanwhile, RAM Ratings head of research and economist Kristina Fong said capital flow volatility is expected to continue for the rest of the year, as market expectations build up towards a possible OPR cut by Bank Negara in November on the back of expectations for a softer growth momentum going forward, as well as the prospect of at least one policy rate hike by the Fed towards year-end.

“Our projected issuance for both Government and corporate issuance remains at RM90bil-RM100bil and RM75bil-RM85bil, respectively,” she noted.

Fong said foreign-held Malaysian Government Securities (MGS) declined for the first time in 12 months to RM181.4bil (-3% month-on-month), which could partly be due to the large amount of maturing MGS during the month totalling RM12.8bil.

“But the decline for other types of securities (the shorter-term ones) could possibly be due to the build-up in market expectations towards a possible OPR cut amid fears of continued weakness in economic activity.

“Furthermore, the global macroeconomic and political uncertainties remained quite high in September, which might have contributed to the overall deterioration of investor sentiment during the month,” she said.