Foreign investors increased their holdings of Malaysian bonds at the fastest pace in over a year, driven by expectations of US rate cuts and domestic bond stability. August 2024 saw foreign ownership of Malaysian bonds rise by RM9.0 billion, pushing total foreign holdings to RM288.1 billion, up from RM279.1 billion in July. The surge in foreign inflows brought the year-to-date total to RM17.6 billion, surpassing the cumulative increase of the previous seven months.

This increase coincided with a decline in the 10-year US Treasury (UST) yield, which dropped by 13 basis points (bps) to 3.90%, its lowest level since February 2024. Market sentiment was buoyed by expectations that the US Federal Reserve would begin easing monetary policy, following dovish signals from Federal Reserve Chair Jerome Powell at the Jackson Hole symposium. Powell hinted that the Fed may "dial back" its restrictive policies as inflation approaches the 2% target, with signs of a cooling labour market.

Despite the dip in UST yields, the benchmark 10-year Malaysian Government Securities (MGS) yield rose by 4bps to 3.76% by the end of August. However, analysts remain optimistic, forecasting that the MGS yield will fall to 3.60% by year-end, as foreign inflows are expected to continue, supported by stable growth fundamentals in Malaysia.

In terms of corporate bonds, the volume of traded corporate bonds increased for the first time in five months, reaching RM18.2 billion in August, reflecting renewed buying interest in rated bonds. New issuances were led by Danum Capital and YTL Power International, with total corporate issuance rising to RM5.82 billion for the month.

With the anticipated policy easing by the US Federal Reserve and stable economic indicators in Malaysia, analysts predict further foreign inflows and continued appreciation of the ringgit in the months ahead. The 10-year MGS yield is expected to trend lower, moving in tandem with UST yields, as the market prices in further rate cuts.